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CHAPTER 8 LAW OF CONTRACT (PART I)

8.1 Introduction
Without conscious about it, we enter into contracts every day. These contracts are largely made orally, for
example, buying coffee at a shop, buying groceries at a sundry shop, boarding a bus, parking our cars etc.
Contracts and agreements are the cornerstones of all commercial transactions as most, if not all, business
activities rely on the contracts agreed by both parties. The parties also wish to know what will be his
remedies if the other party breaches the agreement.

What is a contract?
A contract is an agreement giving rise to obligations which are enforced or recognized by law. The factor
which distinguishes contractual obligations from other legal obligations is that they are based on the
agreement of the contracting parties.

In short, the basic elements of a contract are:

There is an agreement

The agreement stipulates certain obligations

The agreement is legally binding

8.2 Features of a contract


8.2.1 Freedom of Contract
One of the most important features of a contract is that the contracting parties must be allowed to enter into
a contract freely. The parties must be permitted to enter into agreements of their own choice and on their
own terms.

Freedom of contract and sanctity of contract are the dominant ideologies of the law of contract. Parties
should be as free as possible to make agreements on their own terms without the interference of the courts
or Parliament and their agreements should be respected, upheld and enforced by the courts.

8.2.2 The Objective Test


The doctrine of freedom of contract has lately been doubted and this subjective approach to the making of
contracts has now largely been abandoned, though its influence can still be detected in certain rules in the
law of contract. In general, what matters today is not what meaning a party actually intended to convey by
his words or conduct, but what meaning a reasonable man in the other partys position would have
understood him to be conveying.

Thus the general rule is that the intention of the parties is to be assessed objectively. A contracting party is
bound by the terms of the contract notwithstanding whatever his real intentions may be, if a reasonable man
would believe that he was assenting to the terms proposed by the other party and that other party upon that
belief enters into a contract with him. This objective principle is based on the needs of commercial
convenience and certainty. Considerable uncertainly would result if John, after inducing Peter reasonably to
believe that he (John) had agreed to certain terms, could then escape liability merely by showing that he had
no real intention to enter into that agreement.
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However, the above objective test is subject to certain exceptions whereby the subjective test is still relevant
in some situations. So if Peter actually knows that John in fact has no intention to contract with him, or to
contract on terms alleged, then there will be no contract.

8. 3 Cont ract L aw in Mal a ysi a


8.3.1 The Origin of Contracts Act 1950 and Specific Relief Act 1950
In Malaysia, the law of contract can be found in Acts of Parliament, delegated legislation and case law. The
principal statute dealing with contract law is the Contracts Act 1950 (Revised 1974). This Act is a reenactment of the Contracts (Malay States) Ordinance 1950 which was modeled from the Indian Contract Act
1872. Besides some minor amendments, the Contracts Act 1950 is substantially in pari materia with the
Indian Contract Act 1872.

The Indian Contract Act 1872 is largely a codification of the then existing English common law and rules of
equity. In Pollock & Mulla on Indian Contract and Specific Relief Acts, it was stated that the Act is in
effect a code of English law.

The other important Act for the law of contract in Malaysia is Specific Relief Act 1950 which provides for
various remedies and reliefs to the innocent party. Similar to the history of the Contracts Act 1950, the
Specific Relief Act 1950 was modeled after the Indian Specific Relief Act 1877. However, the Indian Act of
1877 has been repealed in India and has now been replaced by the Specific Relief Act 1963.

8.3.2 Reception of English Law


The position in the reception of English law is stated in Section 3 and 5 of the Civil Law Act 1956. Section 3
provides for the general reception of English law in Malaysia. In West Malaysia, common law and rules of
equity as administered in England on 7 April 1956 apply. In Sabah and Sarawak, in addition to the common
law and rules of equity, statutes of general application as administered in England on 1 December 1951 and
on 12 December 1949 apply respectively. These dates are commonly known as cut-off dates which means
that English law will not be binding but is of persuasive authority only. Under section 3(2), where there is any
conflict between common law and equity, the rules of equity will apply.

Section 5 provides that all issues pertaining to the law of partnerships, corporations, banks, principals and
agent, carriers by air, land and sea, marine insurance, average, life and fire insurance, and with respect to
mercantile law generally, the law to be administered shall be the same as that in England.

English law on these matters applies to all states as at 7 April 1956 other than Melaka, Penang, Sabah and
Sarawak. For these four states, the law to be administered shall be the same as would be administered in
England in the like case. Therefore, there is a continuous reception of English law in these four states.
However, the application of both section 3 and 5 are subject to some limitations. Both sections permit
reception of English law unless there are no provisions made under any written law.

In the interpretation of provisions of the Contract Act 1950, English and Indian cases may be relied upon
where the law is similar or the Act embodies common law principles without defining them. Thus in
Government of Malaysia v Gurcharan Singh (1971) 1 MLJ 211, the court relied on the well-established
English definition of necessaries in interpreting the scope of the term in section 69 of the Contracts Act
1950.
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From the local judicial decisions, it is obvious that English cases continue to exert great influence on
Malaysian contract law notwithstanding the existence of Contracts Act 1950. Compared to the wealth of
English judicial decisions that have been developed over many centuries, Malaysia has limited judicial
materials to adjudicate the cases effectively. Therefore, the reception of English cases is understandable
and necessary in some instances.

8.3.3 Relevancy of Indian law


Decisions of the Indian cases are, of course, not binding on Malaysian courts. But because the Malaysian
Act is based on the Indian Contract Act, Indian decisions are obviously persuasive and are consequently
given due weight and treated with greatest respect by local courts. Reay JC in Leonard v Nachiappa Chetty
(1923) 4 FMSLR 265, commented that the decision of the Indian courts are of course not binding here, but
they are very valuable guides and have always been treated with the greatest respect by the Courts in this
country.

However, where the decisions on Indian cases are decided by Privy Council on an India statute which is in
pari materia with a local statute, then it is binding on local courts and not merely persuasive. The Federal
Court in Khalid Panjang v PP (No. 2) (1964) MLJ 108 said:
All we have to say is that the Privy Council were not discussing the law of England. They were
discussing a section in an Indian statute which is word for word the same as the corresponding
section of a local statute. In these circumstances a decision of their Lordships is binding on this
Court and a fortiori, it is binding on every High Court in Malaysia and no judge is at liberty, whatever
his private opinion may be, to disregard it. (at p. 111)

8.4 What is a Contract?


Section 2 (h) of the Contracts Act 1950 provides that a contract is an agreement enforceable by law.

Section 10(1) further provides that All agreements are contracts if they are made by the free consent of
parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby
expressly declared to be void.

Thus, all contracts must be in the form of agreement but not all agreements are contracts. Some
agreements are not contracts because they are not enforceable due to lack of certain elements that form the
basis of a contract. These essential basic elements for a valid and enforceable contract are:
a. Offer (or Proposal)
b. Acceptance
c.

Consideration

d. Intention to Create Legal Relations


e. Certainly
f.

Legal Capacity

g. Free Consent
h. Legality of the Object

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Therefore where one or more of the above ingredients is missing, the agreement is not a contract and the
law will not enforce this agreement. So where John promises Alice to a dinner at a restaurant, the
agreement does not give rise to any contractual duty because it is simply a social agreement and the parties
have no intention to create legal relations.

8.5 Offer
8.5.1 What is an offer?
The fact that an agreement has been reached will often be obvious. The term will have been set out in a
written agreement signed by both parties. However, where the agreement has been reached orally, or by
conduct, there can be problem in such cases. The dealings between the parties are traditionally analysed in
terms of offer and acceptance. Has there been a valid offer made by one party, and a valid acceptance of
that offer made by the other party? An offer is defined as a statement made by one party of a willingness to
enter into a contract on stated terms, provided that these terms are, in turn, accepted by another party to
whom the offer is addressed.

In Malaysia, s 2(a) of Contracts Act 1950 provides:


When one person signifies to another his willingness to do or to abstain from doing anything, with a
view to obtaining the assent of that other to the act or abstinence, he is said to make a proposal.

Although the word proposal is used in the Act, it probably bears the same meaning as offer in English law.

8.5.2 When is an offer valid?


An offer is valid if the following conditions are satisfied:

a. The offer must be communicated, so that the other party may accept or reject it;
b. The offer may be in writing or oral or by conduct;
c.

The offer may be addressed to a particular person or a group of persons or to the whole world;

d. The offer must be definite in substance; and


e. The offer must be distinguished from an invitation to treat.

8.5.3 Communication of offer


An offer is effective when it is communicated to the offeree. In other words, there can be no acceptance of
an offer without knowledge of an offer. The reason for this requirement is that if we say that a contract is an
agreed bargain, there can be no agreement without knowledge of the offer. There can be no meeting of the
minds if one mind is unaware of the other mind. Section 4(1) provides that the communication of a
proposal is complete when it comes to the knowledge of the person to whom it is made.

The authorities are, however, divided on the need to communicate an offer. In the case of Gibbons v Proctor
(1891) 64 LT 594, a policeman was allowed to recover a reward when he sent the required information to the
police in ignorance of the offer of award.

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The other view, which was agreed by most academicians to be better, is that the offer must be
communicated in order for a contract to be valid. This was expressed succinctly in the Australian case of R v
Clarke (1927) 40 CLR 227, there cannot be assent without knowledge of an offer; and ignorance of the
offer is the same thing whether it is due to never hearing of it of forgetting it after hearing. Thus a party who
casually returns a lost property to its owner cannot legally claim a reward if he is unaware of it at the time but
subsequently discovers the existence of an offer of reward for its return.

What if there are cross-offers? In Tinn v Hoffman & Co (1873) 29 LT 271, it was held that even if the crossoffers are identical, it does not create a valid contract unless they are accepted.

Once it is shown that the offer has been communicated to the offeree, a person who knows of the offer may
do the act required for acceptance with some motive other than that of accepting the offer [Williams v
Carwardine (1833) 4 B & Ad 621].

8.5.4 Offer by Conduct


An offer can either be expressed (i.e. in writing or oral) or implied (by conduct). This was provided under
section 9 of the Contracts Act 1950.

8.5.5 Offer made to the world


An offer can either be made to a particular person, a class of person or to the general public. Where it is
made to a particular person, it appears that only the offeree may accept the proposal. However, if an offer is
made to the general public, for example a reward in newspaper for a lost property, then anyone who meets
all the terms of the offer may accept it.

In Carlill v Carbolic Smoke Ball Company (1893) 1 QB 256, the defendant who manufactured carbolic
smoke balls issued an advertisement in which they offered to pay 100 to any person who used one of their
smoke balls and then succumbed to influenza, within a specified time. Mrs. Carlill, after seeing the
advertisement, bought and used the smoke ball and promptly went down with influenza. She sued the
defendant for 100. The defendant argued, inter alia, that an offer to the whole world was not possible in
English law. The court held that an offer can indeed be made to the whole world.

8.5.6 The offer must be certain


An offer must contain terms which are definite and certain so that the other can perform his obligation in
accordance to the terms.

8.5.7 Invitation to treat


An invitation to treat is simply an expression of willingness to enter into negotiation which, it is hoped, will
lead to the conclusion of a contract at a later date. An invitation to treat is not an offer but a sort of
preliminary communication which passes between the parties at the stage of negotiation; for instance, a
price list, a display of goods with price tags, an advertisement etc. In short, an invitation to treat is an
invitation for someone to make an offer. In Gibson v Manchester City Council (1999) 1 WLR 294, the
councils letter which stated we may be prepared to sell you was held to be an invitation to treat and not an
offer.

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The distinction between an offer and an invitation to treat depends largely on the intention of the parties; that
is, did the maker of the statement intend to be bound by an acceptance of his terms without further
negotiation or did he only intend his statement to be part of the continuing negotiation process. This
intention must be judged objectively and not subjectively.

The effect of distinguishing an offer from an invitation is that an offer may lead to a binding contract if it is
accepted whilst a response to an invitation to treat does not lead to an agreement. The response itself may
be an offer.

The courts have already established that there is no intention to be bound in the following cases.

8.5.7.1 Display of goods for sale

In a shop

In Pharmaceutical Society of GB v Boots Cash Chemist (1953) 1 QB 401, the Court of Appeal held that in a
self-service shop, the sale takes place at the check-out counter, when the assistant accepts the customers
offer to buy the goods. The goods on the shelves are mere invitation to treat, i.e. an invitation to the
customer to make an offer for the goods.

In a Shop window

In Fisher v Bell (1961) 1 QB 394, it was held that a flick knife displayed in a shop window with a price
attached, was an invitation to treat.

8.5.7.2 Advertisement
The general rule is that an advertisement in newspaper or magazine is an invitation to treat rather than an
offer.

In Patridge v Crittenden (1968) 1 WLR 1204, an advertisement which said bramble finch cocks and hens for
sale at 25 s was held to be an invitation to treat and therefore did not offend the Protection of Birds Act 1954.
The court pointed out that if the advertisement was treated as an offer this could lead to many legal suits for
breach of contract since his stock of birds was limited, and therefore, he could not have intended the
advertisement to be an offer. This general rule was applied in the Malaysian case of Majumder v AG of
Sarawak (1967) 1 MLJ 101.

Nevertheless there are certain cases where an advertisement may be interpreted as an offer rather than an
invitation to treat. This type of advertisement is normally unilateral in nature. In Carlill v Carbolic Smoke Ball
Co (1893) 1 QB 256 the advertisement was held to be an offer to the whole world and not an invitation to
treat as it is a unilateral offer to general public.

8.5.7.3 Price List and Catalogue


In Grainger & Sons v Gough (1896) AC 325, the court held that a circulation of a price list and catalogue by a
wine merchant is only an invitation to treat.

However, it is not clear whether a price list sent on request to a single customer could be an offer.
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8.5.7.4 Auctions
The general rule is that an auctioneer, by inviting bids to be made, makes an invitation to treat. The offer is
made by the bidder which, in turn, is accepted when the auctioneer strikes the table with his hammer (British
Car Auctions v Wright [1972] 1 WLR 1519). Similarly the advertisement of an auction sale is generally only
an invitation to treat (Harris v Nickerson [1873] LR 8 QB 286).

8.5.7.5 Tenders
Where a party invites tenders for a particular project, the general rule is that the invitation to tender is simply
an invitation to treat. The offer is made by the person who submits the tender and the acceptance is made
when the person inviting the tenders accepts one of them.
However in an appropriate case a court may hold that the invitation to tender was in fact, an offer. In
Harvela Ltd v Royal Trust of Canada (1986) AC 207, the court held that if the request to submit tender is
made to specified parties and it is stated that the contract will be awarded to the lowest or the highest bidder,
then this will be binding as a unilateral offer.

8.5.8 Unilateral and Bilateral Contract


A bilateral contract consists of an exchange of promises. A bilateral offer, therefore, seeks a promise in
return. For example, I will sell you any car for RM10,000 is bilateral offer whereby I will pay RM10,000 for
your car is an acceptance to the offer.

In a unilateral contract, only one party makes a promise while the other party accepted the promise by
carrying out the act. For example, if one says I will pay RM100 to anyone who will find my lost cat and
return it to me, this is a unilateral offer. Acceptance of the offer occurs when the lost cat is returned. Thus,
a unilateral offer is accepted by doing what is requested in the offer. The offeree does not enter into any
promises; he either fulfills the condition or he does not, see example in Carlill v Carbolic Smoke Ball (1983)1
QB 256.

The distinction between bilateral and unilateral contracts is important with regard to:

Advertisements

Revocation of offers

Communication of acceptance

8.5.9 Termination of an Offer


An offer may be terminated in one of these ways:-

8.5.9.1 Revocation
An offeror may withdraw an offer at any time before it is accepted. Section 5(1) of the Contracts Act 1950
provides that a proposal may be revoked at any time before the communication of its acceptance is
complete against the proposer, but not afterwards.

It is important to note that the revocation must be communicated to the offeree before acceptance [see s
6(a)]. In Byrne v Van Tienhoven (1880) 5 CPD 344, the withdrawal of an offer sent by telegram was held to
be communicated only when the telegram was received. However, it is not entirely clear when the
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revocation is treated as being brought to his attention. It could be when the letter reaches his business or it
could be when he actually reads it.

Communication of the revocation is difficult if the offer was made to the whole world as in the case of a
reward in newspapers. It was suggested, however, in the American case of Shuey v USA (1875) that
communication of revocation will be assumed to be complete if the offeror takes reasonable steps to inform
the public, i.e. communicates through the same medium.
For a unilateral offer, it has been established that revocation cannot take place if the offeree has started to
perform the required act. In Errington v Errington (1952) 1 KB 290, a father promised his daughter and sonin-law that if they paid off the mortgage on a house he owned, he would give it to them. The young couple
duly paid the installments, but the father withdrew his offer shortly before the whole debt was paid. It was
held that there was an implied term that the offer was irrevocable once performance had begun.

The situation is not clear whether the offeror must know that the offeree has started to perform.

8.5.9.2 Lapse of Offer


An offer may lapse and thus cannot be accepted if the time prescribed in the offer for its acceptance lapses.
If no time is stipulated, then the offer will lapse after a reasonable time. What amounts to reasonable time is
a matter of fact to be decided by the court. See also s 6(b) of Contracts Act 1950.

An offer may also lapse by the death of the offeror, if the offer was of a personal nature. It is not clear if the
offeree is dead. The generally accepted view is that on the offerees death the offer comes to an end by
operation of law. See s 6(d) of the Act.

An offer will come to an end if a certain event occurs that lead to the situation that the offer cannot be
accepted. In Financings Ltd v Stimson (1962) 1 WLR 1184, it was held that an offer to buy a car lapsed
when the car was badly damaged. See s 6(c).

8.5.9.3 Rejection of Offer


An offer will lapse if the offeree rejects the offer, either expressly or by conduct.

As a general rule, an acceptance must be of a mirror image of the offer. If any alteration is made, or
anything added, then this acceptance will become a counter-offer, and will terminate the offer. In Brogden v
Metropolitan Railway Co (1877) 2 App Cas 666, the defendant sent a written agreement which had been
negotiated to the plaintiff for his signature. The plaintiff signed the agreement and entered the name of an
arbitrator in a space which had been left empty for this purpose. It was held that the returned document was
not an acceptance but a counter-offer.

Once an offer lapses due to counter-offer, it cannot be accepted by the offeree anymore. The original offer
was killed by the counter offer (Hyde v Wrench [1840] 3 Beav. 334)

However, a request for further information is not a counter-offer and will not kill the offer. In Stevenson v
McClean (1880) 5 QBD 346, the defendant offered to sell iron to the plaintiff at certain price. The plaintiff
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telegraphed to enquire whether he could pay by installments. It was held that this was a mere enquiry for
information and not a counter-offer.

8.6 Acceptance
8.6.1 What is an acceptance?
An acceptance is an unqualified expression of assent to the terms proposed by the offeror. It signifies that
an agreement has been reached and both parties are ready and willing to perform the obligations under the
agreement.

In Malaysia, section 2(b) of the Contracts Act 1950 provides:


when the person to whom the proposal is made signifies his assent thereto, the proposal is said to
be accepted: a proposal , when accepted, becomes a promise.

8.6.2 When an acceptance is valid?


An acceptance is valid and hence an agreement is concluded when the following conditions are satisfied:
a. An acceptance must be unqualified assent to all the terms of the offer
b. It must be made while the offer is still valid and in force
c.

The acceptance must be communicated to the offeror

d. An acceptance may be written, oral or implied from conduct


e. A person cannot accept an offer of which he has no knowledge
f.

cross-offer does not constitute an agreement

8.6.3 Unqualified assent and counter offer


The acceptance must not be qualified or with any alteration to the offer. It must be made on exactly the
same terms as offered without modifications or variations. In other words, an acceptance must be absolute
and unqualified.

Section 7(a) of the Contracts Act 1950 stipulates:


In order to convert a proposal into a promise the acceptance must be absolute and unqualified

Therefore a purported acceptance which does not accept all the terms and conditions proposed by the
offeror but which in fact introduces new terms is not an acceptance, but a counter-offer, which is then treated
as new offer; which is capable of acceptance or rejection. The effect of a counter-offer is to kill of the
original offer so that it cannot subsequently be accepted by the offeree. This rule was applied in the case of
Hyde v Wrench (1840) 3 Beav 334 whereby the offeree was not allowed to accept the original offer once he
had made a counter-offer.

8.6.4 Subject to contract


What if an acceptance is made with a qualification of subject to contract or subject to formal contract being
drawn up by our solicitors?
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Under such circumstances, whether an acceptance is valid or not depends largely on facts of the case such
as the intention of the parties is there any more terms to be agreed etc. In the absence of other provisions to
indicate otherwise, the court is inclined to determine that there is no binding agreement until the contract as
stipulated is completed. It is generally held that the intention of the parties is not to make a concluded
bargain at all, unless and until they have executed a formal contract. This rule was applied in the Malaysian
case of Low Kar Yit v Mohd Isa (1963) MLJ 165. In this case the court held that we should look at the
intentions of the parties when they entered into the agreement. If all the key terms have been agreed upon
and there is nothing more to be done except to formalize the agreement, then the agreement is a valid
contract. However if there is only an agreement to enter into contract later, then the agreement is not a
binding contract.

In Charles Grenier Sdn Bhd v Lau Wing Hong (1996) 3 MLJ 327, the Federal Court held that an agreement
to make an agreement does not result in a contract. It is for the court in each case to construe the
correspondence exchanged between the parties and to decide whether that is the result intended by the
parties. In this case, the phrase subject to the sale and purchase agreement does not point to an intention
that no contract was to come into existence until a formal sale and purchase agreement had been prepared
and executed. Rather, it is, when read in the context of the correspondence and the objective aim of the
transaction, an indication of an intention to merely formalize the agreement already concluded between the
parties.

8.6.5 Communication of acceptance


The general rule is that an acceptance must be communicated to the offeror for there to be a binding
contract between parties. Section 7(b) of the Contracts Act 1950 provides:
The acceptance must be expressed in some usual and reasonable manner, unless the proposal
prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it
is to be accepted, and the acceptance is not made in that manner, the proposer may, within a
reasonable time after the acceptance is communicated to him, insist that his proposal shall be
accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the
acceptance

Hence, if the offer specifies a particular mode of communication of acceptance, then the offeror may insist
that the prescribed mode to be used. But if he fails to do so within a reasonable time, then it is deemed that
he accepts the acceptance. Where no mode is specified, then the acceptance must be expressed in some
usual and reasonable manner.

What if a method of communication is specified whereas the offeree uses another method of acceptance?
The general rule is that if the other method used is no less advantageous to the offeror, the acceptance is
good and a contract is formed.

The acceptance is generally only communicated validly when it is actually brought to the attention of the
offeror. Lord Denning in Entores v Miles Far East Corp (1955) 2 QB 327 said that if an oral acceptance is
drowned out by an overflying aircraft, such that the offeror cannot hear the acceptance, then there is no
contract unless the offeree repeats his acceptance once the aircraft has passed over.

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8.6.6 Communication by instantaneous/electronic means


In the case of instantaneous communication, such as telephone and telex, the acceptance takes place at the
moment the acceptance is received by the offeror and at the place at which the offeror happens to be. In
Entores v Miles Far East Corp (1955) 2 QB 327, which was confirmed later in Brinkibon Ltd v Stahag Stahl
(1983) 2 AC 34, it was held that during office hours, acceptance takes place when the telex message is
printed out, not when it is read. For acceptance communicated via a voice recorder, it is not clear if
acceptance takes place when the message is recorded or when it is played back. It has been argued that the
offeror must have listened to the message before it takes effect as the acceptance must actually be
communicated.

However, it is not entirely clear on the modern tool of instantaneous communication such as short message
service (sms), fax, email etc. There is no case yet in both England and Malaysia in this situation. Because of
the technology involved in both these forms of communication, they are not entirely instantaneous. An email,
in particular, may take some time to arrive at its destination, depending upon the route it takes to its recipient.
In some cases, the email is lost and never received by the intended recipient. As for the fax, it is generally
accepted that the acceptance takes place when the fax is printed out and not when it is read.

8.6.7 Exceptions to the Communication Rule


The rule that acceptance must be communicated to the offeror is not an absolute one. There are various
exceptions to the general rule:
a) The offeror may waive the requirement of communication of acceptance. This may be done
expressly as in the case of Felthouse v Bindley (1862) 11 CB 869 or implicitly as in the case of Carlill
v Carbolic Smoke Ball (1893) 1 QB 256
b) When failure of communication is the fault of the offeror
c) When the post is deemed to be the proper method of communication, acceptance takes place when
a letter is posted, not when it is received (The Postal Rule)

8.6.8 Act of Acceptance


While communication of an acceptance may be waived, it will still be necessary for the offeree to do some
positive acts to signify his assent, silence, absence of response or just total disregard of the offer is not
acceptance as there is no positive act to indicate ones willingness to accept the offer.

The offeree may accept an offer in writing or orally or by conduct. In a unilateral contract such as in the case
of Carlill v Carbolic Smoke Ball, an acceptance is made by the conduct of performing the required action.

This is also stipulated in s 8 of the Contracts Act 1950 which stipulates that performance of the conditions
of a proposal is an acceptance of the proposal.

8.6.9 Acceptance by Silence


As an offeree must do some positive acts to signify his acceptance, an offeror may not stipulate that the
silence of the offeree will amount to an acceptance. For example, the offeror may stipulate that if I do not
hear from you within 7 days, I shall assume that you have accepted my offer. The offeree may safely ignore
such a statement. If the law were otherwise, we shall all be in an untenable position. All manners of offers
would address to us, obliging us to reject them on penalty of legal liabilities.
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The rule was established in the case of Felthouse v Bindley (1862) 11 CB 869. In this case, the plaintiff
wrote to his nephew offering to buy a horse, and wrote If I hear no more I will take it that the horse is
mine. The nephew did not reply to this letter, but told the defendant, an auctioneer who was to sell his horse,
that this horse was to be kept out of the sale. It was held that there was no contract as the acceptance was
not communicated to the offeror.

However, acceptance by silence must be distinguished from acceptance by conduct. In Roberts v Hayward
(1828) 3 C&P 432, a tenant accepted his landlords offer of a new tenancy at an increased rent by simply
staying on the premises. It was held that he had accepted the landlords offer by his conduct though he has
kept silence about his acceptance.

8.6.10 The Postal Rule


When an acceptance in the form of writing is posted to the offeror, the general rule is that the acceptance
takes place when the letter is posted and not when it is received. This is also known as the postal rule and
it was established in the case of Adams v Lindsell (1818) 1 B & Ald 681. This postal rule is also codified in
section 4, illustration (b) of the Contracts Act 1950.

Under the rule, a postal acceptance takes effect when the letter of acceptance is posted, i.e. when it is in the
control of the post office or of one of its employees authorized to receive letters. Once the letter of
acceptance is posted, the transaction becomes binding irrespective of any delay or lost in the course of
transit (Household Insurance v Grant [1879] 4 ExD 216). An acceptance by telegram similarly takes effect
when the telegram is communicated to a person authorized to receive it (Bruner v Moore [1904] 1 Ch 305).

However the postal rule was criticized as it may post difficulties and injustice to the offeror:
a) The offeror may be bound by the acceptance not withstanding that the letter of acceptance may be
lost or delayed because it bears a wrong or incomplete address. Normally such misdirection will be
due to the carelessness of the offeree. There is no authority on this point. However GH Treitel
argued that postal rule should not apply to such case.
b) One of the problems is that contracts can be formed without the offeror being aware of the contract.
For example, an offeror makes an offer and unbeknown to him, the offeree accepts the offer. The
offeror then revokes the offer before receiving the postal acceptance and contracts with another
party. In this case, the offeror is now in breach of his contract with the original offeree.
c) If the letter of acceptance is lost in post, the offeror is not aware that his offer has been accepted and
therefore will not act. He may later be liable to the offeree for breach of contract for failure to carry
out the obligations in the contract.

The postal rule will not be applicable where it would lead to manifest inconvenience and absurdity (Holwell
Securities Ltd v Hughes [1974] 1 WLR 157). It may also be excluded expressly or impliedly by the offeror,
e.g. requiring notice in writing (Holwell Securities), i.e. the acceptance must actually be received by the
offeror.

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8.6.11 Revocation of acceptance


An acceptance may be revoked at any time before the communication of the acceptance is complete as
against the acceptor, but not afterwards. This is provided for under s 5(2) of the Contracts Act 1950.

If the offeree telephoned the offeror to revoke his letter of acceptance sent by post and the letter is yet to
reach the offeror, the interesting question here is whether the revocation is valid? The illustration to s 5 of
the Act provides that the offeree may revoke his acceptance at any time before or at the moment when the
letter communicating it reaches the offeror, but not afterwards.

It must be noted that postal rule does not apply to the revocation of acceptance. The revocation must
actually be communicated to the offeror and not merely by sending the revocation by post.

8.6.12 Cross-Offers
The general rule is that acceptance in ignorance of an offer cannot create a contract since the parties must
have agreed on the terms and reached an agreement. It is not enough that their wishes happened to
coincide: the act or promise constituting the acceptance must be given in exchange for an offer. Therefore, if
two persons make identical cross-offers and if neither party knowing of the others offer when he makes his
own, then there is no contract between them. For example, if A writes to B offering to sell his car for
RM50,000 and B simultaneously writes to A offering to buy the car for RM50,000, and if no further
communication took place between them, then the contract does not exist.

8.7 Consideration
8.7.1 Doctrine of Consideration
In English law and similarly in Malaysian law, a promise is not, as a general rule, binding as a contract
unless it is supported by some consideration. The purpose of the requirement of consideration is to put
some legal limits on the enforceability of agreements even where they are intended to be legally binding and
are not vitiated by some factors such as mistake, misrepresentation, duress or illegality.

The basic feature of this doctrine of consideration is the idea of reciprocity; something of value in the eyes
of the law must be given for a promise in order to make it enforceable as a contract. For example, an
informal gratuitous promise not supported by any consideration does not amount to a contract. In this case,
a promise to make a gift will not generally be treated as legally binding.

In Malaysia, s 26 of the Contracts Act 1950 provides that an agreement made without consideration is void.

8.7.2 What is consideration?


Consideration was defined in the case of Currie v Misa (1875) LR ID Ex 153:
A valuable consideration in the eyes of law may consist either in some right, interest, profit or
benefit to one party, or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by others.

Section 2(d) of the Act also provides for similar definition.


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Therefore, consideration may be understood as a sort of bargain or the price which one party pays for the
promise by another party. The promise may be in the form of an act or omission (i.e. to abstain from doing
something).

8.7.3 Types of Consideration


8.7.3.1 Executory Consideration
Executory consideration is a promise to do something in the future, for example, A agrees to sell B a car and
B promises to pay RM10,000 30 days later for it when A delivers the car to him.

8.7.3.2 Executed Consideration


An executed consideration is an act or promise which has been wholly performed at the time the contract is
entered into. For example, A offers RM100 to anyone who finds and returns his handphone which was lost.
B finds and returns the handphone in response to the offer. Bs consideration for As promise has been
executed when he returns the handphone to A.

8.7.3.3 Past Consideration


Where a promise is made subsequent to and in return for an act that has already been performed, the
promise is therefore made based on the consideration that has been past. So if B finds and returns the
handphone without A making any reward, and subsequently A promises to pay RM100 to B when he returns
the handphone, the promise to pay is made on a past consideration. Under English law, the general rule is
that past consideration is insufficient to support a contract and therefore not valid (Re McArdle [1951] 1 All
ER 905). By past consideration it simply means that your consideration has already completed before I
made my promise; so that you have not given anything new in return for my promise. This English rule is of
some antiquity and many objections have been raised and exceptions have since been developed. One of
the major objections is that there is no reciprocity; the promisee does not give anything in return for the
promise made by the promisor.

In Malaysia, however, under the Contracts Act 1950, past consideration is accepted as good consideration
under 3 situations.
(i) Section 2 (d) provides that when, at the desire of the promisor, the promisee or any person had done or
abstained from doing something, such act or abstinence promise is called a consideration for the promise.
Thus if A requests B to wash his car and when B finishes the work, A promises to pay RM 50 for the work
done, then this promise is enforceable as a valid contract. What is then at the desire? In South East Asia
insurance v Nasir Ibrahim (1992) 2 MLJ 355, the court held that the word desire is synonymous with the
word request.
(ii) Section 26 (b) also deals with the issue of past consideration where it provides that a promise to
compensate for something voluntarily done for the promisor is a good consideration.
(iii) Section 71 provides that if the act is done by a promisee not intending to do so gratuitously, then the act
done provides good consideration. Here the promisee needs to prove that he did not intend to do so
gratuitously. This can be expressed or implied from circumstances.

8.7.4 Consideration may move from third party


Under the English law, the consideration must move from the promisee to the promisor, i.e. the person who
receives the promise must himself give something in return. Therefore only a person who has provided
consideration for a promise can enforce the promise.
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The situation in Malaysia differs from that in England whereby the consideration may move from third party.
This is provided under section 2(d) in which it is stated that the consideration could be provided by the
promisee or any other person. So assuming A, B and C are parties to an agreement where C promises to
pay A RM100 if A repairs Bs car. If C refuses to pay A later, then A can sue C for the money even though A
has not provided any consideration to C.

8.7.5 Consideration need not be adequate


One of the important doctrines in the law of consideration is that consideration need not be adequate but it
must be sufficient. That is to say, the courts will not enforce a promise unless something of value is given in
return for the promise. This is meant by saying that consideration must be sufficient. On the other hand,
the courts do not, in general, ask whether adequate value has been given in return for the promise or
whether the agreement is harsh or one-sided (although here a significant role is played by the doctrines of
duress and undue influence). This is what it meant by saying that consideration need not be adequate. So
if a house worth RM500,000 is sold for RM1 that is sufficient consideration, even though it is manifestly
inadequate.

Since consideration need not be adequate, acts or omissions of very small value can be a good
consideration and in some cases, objects of trifling value can constitute consideration. In Chappel & Co v
Nestle (1960) AC 87, Nestle offered for sale gramophone records in return for 1s 6d and three wrappers
from their chocolate bars. The House of Lords held that the wrappers themselves, although of very trivial
economic value, were nevertheless part of a consideration. This was so even though Nestle threw away the
wrappers.

This doctrine was codified in the Contracts Act 1950 in which explanation 2 to section 26 provides that an
agreement to which the consent of the promisor is freely given is not void merely because the consideration
is inadequate. In Phang Swee Kim v Beh I Hock (1964) MLJ 383, the Federal Court held that as long as
there was consideration, inadequacy of consideration was immaterial. Mere inadequacy of consideration is
not a sufficient ground to set aside a contract.

8.7.6 What does not amount to consideration?


In some instances, considerations provided by a party may be regarded by the courts of law to be
insufficient and consequently not a good consideration. For example, doing something which one is legally
bound to do cannot amount to consideration. The reason being he was already legally bound to do the act;
he suffers no legal detriment or disadvantage.

There are two types of situations in which the consideration provided or duty performed is regarded by law
as insufficient and hence not a good consideration.
a)

Performance of a duty imposed by law

The question whether performance of a duty which one is already under an obligation to perform imposed by
law can constitute consideration is currently a very controversial one in contract law. It has been generally
accepted that a person, who by his official status or through the operation of the law is under a public duty to
act in a certain way, is not regarded as furnishing consideration merely by discharging that duty. No one, for
example, would expect a policeman or fireman to bargain with a citizen for the price of his protection or effort
in distinguishing a fire. This legal principle was stated in Collins v Godefroy (1831) 1 B & Ad 950 in which a
promise to pay a fee to a witness who has been properly subpoenaed to attend a trial was held to have been
made without consideration. The witness had a public duty to attend.
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But if a person does, or promises to do, more than he is required to do by law, then he will be regarded by
law as providing consideration. In Glassbrook v Glamorgan County Council (1925) AC 270, the council, as
police authority, sued on an agreement to pay for police protection of a coal mine during a strike. The police
authorities thought it is enough to provide a mobile force, agreed to provide the latter at an agreed price.
The company refused to pay and when sued, pleaded the absence of consideration, The House of Lords
held that the police were bound to afford protection, but they had a discretion as to the form it should take,
and an undertaking to provide more protection than in their discretion they deemed necessary was
consideration for the promise of reward.

In Ward v Byham (1956) 2 All ER 318, a mothers promise to ensure that the child was well-looked after and
happy was held to be a good consideration as she was doing more than her legal obligation.

In Malaysia, this legal principle is codified under s 26(b) where it provides that an agreement without
consideration is valid if it is a promise to compensate .. a person who has voluntarily done .. something
which the promisor was legally compellable to do.
b)

Performance of a contractual duty owed to the promisor

The general rule is that performance of an existing contractual duty owed to a promisor was not a valid
consideration for a fresh promise given by that promisor. Thus if A is bound to do something by virtue of a
contract with B, performance of that duty or the promise to perform that duty cannot be consideration for a
further promise by B. There are two types of cases under this category:

A request for extra payment for doing the same work


In Stilk v Meyrick (1809) 2 Camp 317, two sailors deserted their ship, the captain promised the rest of
the crew extra wages if they would sail the ship back home. It was held that the crews were already
bound by their contract to meet the normal emergencies of the voyage and were doing no more than
their original contractual duty in sailing the ship back to London. This could not be good consideration
for a promise of additional wages.

Where the promisor, however, performs more than he had originally promised, then there can be
consideration. In Hartley v Ponsonby (1857) 7 EL & BL 872, nearly half the crew deserted a ship. This
discharged the contracts of the remaining sailors as it was dangerous to sail the ship home with only half
the crew. The sailors were therefore free to make a new bargain, so the captains promise to pay them
additional wages was enforceable.

Exception to the rule in Stilk v Meyrick


In Williams v Roffey Bros & Nicholls (1991) 1 QB 1, the main contractor were refurbishing a block of flat
and they sub-contracted the carpentry work to the plaintiff. The plaintiff ran into financial difficulties,
whereupon the defendant agreed to pay an additional sum if they completed the work on time. It was
held that where a party to an existing contract later agree to pay an extra bonus in order that the other
party performs his obligations under the original contract, then the new agreement is binding if the party
agreeing to pay the bonus has thereby obtained some new practical advantage or avoided a
disadvantage. In this particular case, the advantage to the main contractor was the avoidance of a
penalty clause and the expense of finding new carpenters.

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However this case is not easily reconcilable with Stilk v Meyrick and the decision was criticized by some
academicians.

Part payment of a debt


An old rule was established in the Pinnels Case (1602) 5 Co Rep 117a in which a promise to accept part
payment of a debt in discharge of the entire debt was held not supported by consideration. This old rule
is somewhat similar to the rule that performance of an existing contractual duty owed to the promisor
does not constitute consideration. In this case the debtor is already contractually obliged to repay the
entire debt and so provides no consideration for the creditors promise to accept part payment. So if a
creditor is owed RM100 and agrees to accept RM90 in full settlement, he can later insist on the
remaining RM10 being paid since there is no consideration for his promise to waive the RM10.
The rule in Pinnels Case was later confirmed by the House of Lords in Foakes v Beer (1884) 9 App Cas
605. Dr. Foakes was indebted to Mrs. Beer on a judgment sum of 2090. It was agreed by Mrs. Beer
that if Foakes paid her 500 in cash and the balance of 1590 in installments, she would not take any
proceedings whatsoever on the judgment. Foakes paid the money as agreed but Mrs. Beer then
proceeded to claim an additional 360 as interest on the judgment debt. The court held that there was
no consideration for the promise and that Foakes was still bound to pay the additional sum.
However if something extra is done, for example by paying early, or giving goods rather than money,
then the whole debt will be discharged. But payment of debt of lesser amount on or after the due date
for payment will never provide consideration for a promise to forego the balance.

This rule has been regarded with some disfavour over the past 100 years and in some circumstances its
effect can be avoided by the doctrine of promissory estoppel.

The law in Malaysia with respect to this aspect differs from that in England. Section 64 provides that a
promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or
may accept instead of it any satisfaction which he thinks fit. Therefore a promisee can validly agree to
accept as consideration something other than that which was originally promised. Illustration (c) of
section 64 also clearly shows the effect of this section. It states: where A owes B RM5,000 and B
accepts from C RM1,000 in satisfaction of his claim against A, this payment would discharge the whole
claim.

In Kerpa Singh v Bariam Singh (1966) 1 MLJ 38, the court held that section 64 materially altered the
English doctrine of accord and satisfaction. Similarly in Associated Pam Malaysia Cement Sdn Bhd v
Syarikat Teknikal & Kejuruteraan Sdn Bhd (1990) 3 MLJ 287, the Supreme Court observed that section
64 of Contracts Act 1950 represents a departure from the common law in England.

c)

Performance of contractual duty owed to third party

However where a duty is owed to a third party, its performance has been recognized as good
consideration for a promise by another. It is obvious that the third party is getting something more than
he is entitled to.

In Shadwell v Shadwell (1860) 9 CB (NS) 159, an uncle promised to pay an annual sum of 150 to his
nephew on hearing of his intended marriage. The claimant sued to enforce the promise and it was held

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that he could do so because he had provided consideration for his uncles promise by marrying Ellen.
See Pao On v Lau Yiu Long (1980) AC 614 also.

8.7.7 Exceptions to the General Rule


Section 26 of the Contracts Act 1950 has provided several exceptions to the general rule that an agreement
without consideration is void. The exceptions are:
a) An agreement made on account of natural love and affection between parties standing in near
relation to each other;
b) An agreement to compensate for a past voluntary act;
c) An agreement to compensate a person who did an act which the promisor was legally compellable
to do;
d) An agreement to pay a statute-barred debt, such as debt barred by limitation.

8.7.8 Promisory Estoppel


The doctrine of promisory estoppel is primarily concerned with the modification of existing contracts. Under
the classical common law of contract, such modification would only be binding if consideration was supplied.
Promisory estoppel may be defined as when, by words or conducts, a person makes an unambiguous
representation as to his future conduct, intending the representation to be relied on, and the representee
alters his position in reliance on it, the representor will be unable to act inconsistently with the representation
if by so doing the representee would be prejudiced.

This doctrine was initially established in the case of Hughes v Metropolitan Railway Co. (1877) 2 App Cas
739 and it was made famous by Lord Denning in the case of Central London Property Trust Ltd v High Trees
House Ltd (1947) KB 130.

In the High Tree case, the plaintiffs let a block of flats to the defendants. In 1940, they agreed to accept half
rent without any consideration since many of the flats were not occupied due to outbreak of war. In 1945,
the flats were all let out and the plaintiffs claimed full rent again from 1945 onward. The court held that the
plaintiffs are entitled to claim for full rents from 1945 as the arrangement for half-rent was only intended to
last during the war. However, the plaintiffs are estopped by their promise from claiming full rent from the
period from 1940 to 1945.

In order to invoke this doctrine, following conditions must be complied with:


a) The doctrine must relate to a modification of an existing right and not creation of a new course of
action
b) The promise must be clear and unequivocal
c) It must be inequitable to allow the promisor to go back on his promise and revert to his legal rights
d) The promisee must have acted in reliance on the promise
e) It must be used as a shield and not a sword, i.e. the promisory estoppel could not be used as the
basis of a cause of action to sue others

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8.8 Intention to Create Legal Relation


8.8.1 General Rule
The fact that the parties have reached agreement does not necessarily mean that they have concluded a
legally enforceable contract, even where the agreement is supported by consideration. Traditionally, the law
will require evidence that the parties intend to create legal relations and that the agreement be legally
enforceable. Such intention may be either express or implied from the circumstances.

Over the years, the English law has developed two presumptions in the determination of intention with
respect to agreements.

For domestic and social agreements, there is a presumption that no legal relations are contemplated by the
parties and therefore the agreements are generally not enforceable.

For commercial agreements, there is a presumption that the parties intend to create legal relations and all
agreements signed are to be enforceable. However, both the above presumptions are rebuttable to mean
otherwise. In this instance, the burden is a heavy one and clear evidence is required to rebut.

8.8.2 Domestic and Social Agreements


Agreements are made every day in social and family life, for example, a husband promises to pay his wife
RM50 for typing his notes, a boy friend promises a dinner for his girlfriend during Valentines Day etc. It
would be horrified and socially unacceptable if they could be taken to court for such social arrangements.
Parties do not contemplate any legal action where an invitation to a dinner is accepted or an arrangement is
made between spouses for the maintenance and upkeep of the home.

In Balfour v Balfour (1919) 2 KB 571, the court refused to enforce a promise by the husband to give his wife
30 a month whilst he was working abroad in Sri Lanka. However the presumption was rebutted in the case
of Merritt v Merritt (1970) 1 WLR 1121 in which the court upheld an agreement between the spouses who
were about to separate. In such a case, the parties would have bargained keenly and do not rely on
honourable understanding. Similarly the presumption was rebutted in Todd v Nicol (1957) SASR 72. In this
case, the court held that in considering the expense and trouble the parties have been to in selling up and
moving to Australia, the agreement must be intended to be binding. Otherwise the plaintiff would have been
subject to the whim of the defendant in such an important aspect of their lives.

Similarly, agreements between parents and children are presumed to be not legally binding. In Jones v
Padavatton (1969) 1 WLR 328, Mrs. Jones persuaded her daughter to give up her job in Washington and
came to England to read law by promising her a monthly allowance of USD 200. Her daughter agreed but
was not successful in her study. Mrs. Jones stopped paying monthly allowance but allowed her daughter to
live in her house and receive the rents from other tenants. Mrs. Jones later sued for possession of the
house and her daughter counter-claimed for breach of contract. The court held that the agreement of paying
monthly allowance was not intended to be legally binding and that the mother was entitled to possession.

Social arrangements are also presumed not to give rise to legal relations. See Lens v Devonshire Social
Club (1914) Times. In Coward v MIB (1963) 1 QB 259, the court found that an agreement to take a friend to
work in exchange for petrol money was an arrangement which lacked contractual intention. The
presumption may be rebutted by evidence of contrary intentions. However, a mere subjective intention to
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create legal relations will not suffice. There must be some objective evidence of a contrary intent. Three
important factors that the court will look at are:
a) The context and surrounding facts of how the agreement was made. If an agreement is entered into
by family members in which it contains business context, such as selling shares in a company, the
court is more readily to infer that the presumption is rebutted. See Snelling v John Snelling (1973) 1
QB 87.
b) If there is a reliance on the promise and the promisee acted to his detriment, then it is more likely
that the presumption is rebutted. See Parker v Clark (1960) 1 WLR 286.
c) If the agreement is not vague and certain, then the court will be more willing to infer contractual
intention.

8.8.3 Commercial Agreement


The presumption is that parties to a commercial agreement do intend to create legal relations and the
rebuttal is a heavy one. The onus of proof on the rebuttal is on the party seeking to exclude legal relations.
In Esso Petroleum Ltd v Commissioners of Customs and Excise (1976) 1 WLR 1, Esso promised to give one
world cup coin with every four gallons of petrol sold. The Customs Department sought to subject these coins
to a purchase tax on the ground that they had been sold. A majority in the House of Lords held that the
presumption was not rebutted and there was intention to create legal relations.

The presumption may be rebutted by an express term of the contract which states that the parties do not
intend to create legal relations. The parties must, however, make their intention clear. Clear words must be
used to express their intentions.

Some examples of such rebuttal are:


a) The agreement is not entered into as a formal or legal agreement, and shall not be subject to legal
jurisdiction in the Law Courts (Rose and Frank v JR Crompton and Bros Ltd [1925] AC 445)
b) Agreement to be binding in honour only (Jones v Vernon Pools [1938] 2 All ER 464)
c) Letters of Comfort, i.e. statements to encourage lending to an associated company (Kleinwort
Benson Ltd v Malaysia Mining Corp [1989] 1 WLR 379)

8.9 Certainty
8.9.1 Non-binding
In order for a contract to be binding, the parties must express their agreement in a form which is sufficiently
certain for it to be enforceable. The primary reason behind this rule is that it is for the parties, and not the
courts, to make the contract. The function of the court is to interpret the contract made by the parties.
Therefore if the agreement contains terms that are uncertain there is no way for a court to interpret the
contract and to ascertain what the intentions of the parties are. In short, if the terms of the contract cannot
be determined with certainty, there is no contract for the court to interpret. In Malaysia, s 30 of the Contracts
Act 1950 provides that agreements, the meaning of which is not certain, or capable of being made certain,
are void.

Generally, an agreement lacks certainty either because it is too vague or because it is obviously incomplete.

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8.9.2 Vagueness
An agreement may be so vague that no definite meaning can be given to it without adding new terms. In
Scammell & Nephew Ltd v Ouston (1941) AC 251, the House of Lords held that an agreement to buy goods
on hire-purchase was too vague to be enforced, since there were many types of hire-purchase agreements
in widely different forms. So it was impossible to say on which terms the parties intend to contract.

But the courts do not expect commercial documents to be drafted with strict precision and will, particularly if
the parties have acted on an agreement, do their best to avoid striking it down on the ground that it is too
vague.

Vagueness can be cured by following methods:


a) It can be resolved by trade custom where a word commonly used has a specific meaning within the
trade usage
b) There was previous dealings between the parties whereby a word or phrase has acquired a specific
meaning; e.g. timber of fair specification in Hillas v Arcos (1932) 147 LT 503
c) The contract itself which provides a method of resolving an uncertainly and vagueness
d) The clause which is meaningless can be severed from the agreement

8.9.3 Incompleteness
An agreement may be incomplete because the parties have failed to reach agreement on some issues.
There is, for example, no contract if an agreement for a lease fails to specify the date on which the term is to
commence. Similarly an agreement for the sale of land by installments is not a binding contract if it provides
for conveyance of a proportionate part as each installment of the price is paid but fails to specify which part
was to be conveyed in each payment.

An agreement may also be incomplete if it expressly requires further agreement to be reached on points as
left open. Generally, an agreement to agree in the future, i.e. an agreement to make an agreement, will not
constitute a binding contract. In Walford v Miles (1992) 2 AC 128, an agreement to negotiate in good faith
was held to be too vague and incomplete. Similarly, in Courtney & Fairbairn Ltd v Tolani Bros (1975) 1 WLR
297, it was held that there was no contract where the parties had simply agreed to negotiate.

8.10 Legal Capacity


8.10.1 Competent to contract
For an agreement to be enforceable the contracting parties must be competent to do so, i.e. they must have
full legal capacity to enter into contract. Where one or more parties to a contract lack such capacity, the
contract may be void. Section 10 of the Contracts Act 1950 provides that all agreements are contracts if
they are made by the free consent of the parties competent to contract.

Then who are the parties that are competent to contract? Section 11 of the Act codifies the common law rule
and provides that every person is competent to contract who is of the age of majority according to the law
and who is of sound mind.

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However, the Act does not expressly provide for the effect of an agreement that is entered into by
incompetent parties. In the Indian case of Mohori Bibee v Dhurmodas Ghose (1903) ILR 30 Cal. 539, the
minor had mortgaged his property to an adult and the Privy Council held that the combined effect of section
10 and 11 of the Indian Contract Act, which is similar to the same sections of the local Act, rendered such
contracts void and not voidable. The court also held that the adult cannot rely on s 65 and s 66 to recover
any benefits conferred to the minor. This so because s 65 of the Indian Contract Act (equivalent to s 66 of
Malaysia Contracts Act) starts from the basis of there being an agreement or contract between competent
parties and has no application to a case in which there never was, and never could have been, any contract.
However in Leha bte Jusoh v Awang Johari bin Hashim (1978) 1 MLJ 202, the minor has purchased a
property from an adult, the Federal Court did not refer to the views of Privy Council in Mohori Bibee and held
that s 66 is applicable. In this case, the court ordered the adult to refund the purchase price of a piece of land
to the infant upon the infant vacating the land occupied by him.

8.10.2 Minor
A minor is a person who has not reached the age of majority and it is 18 years as provided in the Age of
Majority Act 1971.

Other than several statutory and common law exceptions, the general rule is that all contracts entered into
by a minor are void. The law adopts a particularly protective attitude towards minor who are often at the
expense of those who deal with them. However there is a competing policy that the law does not wish to
expose to hardship those deal fairly and in all good faith with such persons. Thus, the common law and
some local statutes have provided several exceptions and some of the important exceptions are explained
below.

8.10.2.1 Necessaries
Under common law, a minor is liable to contracts for necessaries where the contract as a whole is for the
benefit of the minor. But if the terms are harsh or onerous, then the contract is not binding upon the minor.
Section 69 of the Act codifies the above common law rule and provides that if a person, incapable of
entering into a contract, is supplied by another person with necessaries suited to his condition in life, the
person who has furnished such supplies is entitled to be reimbursed from the property of such incapable
person.

The word necessaries is not defined in the Act and it has been held by the court that it must be construed
broadly. Thus the legal interpretation is much wider than bare essentials of life and includes goods and
services reasonably necessary to the minors actual requirements such as food, shelter, clothing, medical
and education.

8.10.2.2 Contract of Employment


The common law provides that a minor is bound by a contract of employment if that contract is generally for
his benefit.

In Malaysia, section 13 of the Children and Young Person (Employment) Act 1966 provides that a minor of
14 years and above is competent to enter into a contract of employment.

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8.10.2.3 Scholarship agreement


The Contracts Act 1950 was amended in 1976 and now no scholarship agreements shall be invalidated on
the ground that the student when entering into the agreement is a minor. However, the section applies only
to scholarship agreement between the government and the minor and does not cover the agreements
between minors and private organizations.

8.10.3 Mental Incapacity and Drunkenness


For an agreement to be enforceable, 2 key elements must be present: a meeting of mind and free consent.
Therefore a person who suffers from mental disability, either permanently or temporarily, at the time of
contract lacks the capacity to enter into an agreement, section 11 of the Act provides that a person with
sound mind is competent to contract.

What is a sound mind for the purpose of contracting? Section 12(1) provides:
A person is said to be of sound mind for the purpose of making a contract, at the time when he
makes it; he is capable of understanding it and of forming a rational judgment as to its effect upon
his interests.

A person usually suffering from mental disorder may make a contract during those periods when he is sound.
It matters not if that person was of unsound mind prior and subsequent to the making of the contract. See
illustration (a) of section 12.

Similarly, a person who is so drunk that he cannot understand the terms of a contract, or form a rational
judgment as to its effect on his interests, cannot contract whilst such drunkenness lasts. See illustration (b)
of section 12.

8.11 Free Consent


Free consent is an important element for the formation of a contract. There must be a meeting of the minds
as to the nature and scope of the contract. In short, there must be a consensus ad idem. Section 10(1)
provides that all agreements are contracts if they are made by the free consent of parties competent to
contract.

What constitute consent? Section 13 provides that two or more persons are said to consent when they
agree upon the same thing in the same sense. In addition the consent must be free and not induced by
other means.

When is consent free? Section 14 provides that:


Consent is said to be free when it is not caused by:
a) Coercion, as defined in section 15;
b) Undue influence, as defined in section 16;
c) Fraud, as defined in section 17;
d) Misrepresentation, as defined in section 18; or
e) Mistake, subject to sections 21, 22 and 23
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Consent is said to be so caused when it would not have been given but for the existence of such coercion,
undue influence, fraud, misrepresentation or mistake.
Therefore, any agreements procured under any of the above situations will render the agreement invalid and
the contract is either void or voidable.

8.12 Legality of the Object


8.12.1 Contract void for illegality
As a general rule, the courts, under the common law, will not enforce a contract which is illegal, i.e. the
contract involves the commission of a legal wrong or is in some way contrary to public policy; nor as a
general rule, will the courts permit the recovery of benefits conferred under such a contract.

A number of justifications can be adduced to support such a rule. The first is that the court cannot be called
upon to aid a willing party to an illegal contract or to a contract which is contrary to public policy. The second
is that justice would be tainted and the dignity of the court would be offended by intervention on behalf of the
plaintiffs. The third is that a refusal to grant relief will make entry into illegal contracts a hazardous enterprise
and will thus deter people from entering into such contract.

Under the Contracts Act 1950, s 10(1) states that a contract must be made by the free consent of competent
parties, for a lawful consideration and with a lawful object. In addition, s 24 provides:
The consideration or object of an agreement is lawful, unlessa) It is forbidden by a law;
b) It is of such a nature that, if performed, it would defeat any law;
c) It is fraudulent;
d) It involves or implies injury to the person or property of another; or
e) The court regards it as immoral, or opposed to public policy.

In each of the above cases, the consideration or object of an agreement is said to be unlawful. Every
agreement of which the object or consideration is unlawful is void.

8.12.2 Illegality under Statutes


A contract is illegal if its formation is expressly or impliedly prohibited by statutes. Where the making of such
a contract is expressly prohibited, no difficulties arise; the contract is illegal. Great difficulties arise where it
is alleged that Parliament has impliedly prohibited the making of such contract. The function of the court in
such a case is to interpret the statute to discern whether on its proper construction, the said Act prohibits the
making of such a contract. The difficulty is that Parliament does not normally address its intention clearly in
an Act. So the process of finding the intention of Parliament is frequently an extremely artificial one.

Some of the statutory illegalities provided in the Contracts Act 1950 are:

S 25 where consideration for the objects is in part unlawful

S 27 an agreement in restraint of marriage

S 28 an agreement in restraint of trade, profession or business

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S 29 agreement in restraint of legal proceedings

S 31 agreement by way of wager

8.12.3 Illegality under common law


Besides the above statutory illegality, a contract may be illegal at common law. The scope of the doctrine of
illegality at common law in England is very wide and it is normally grouped under the maxim that a court will
not enforce a contract which is contrary to public policy. Illegality at common law therefore goes beyond
contracts to commit a crime and extends, for example, to contracts which are contrary to good morals such
as prostitution. In Pearce v Brooks (1866) LR 1 Ex 213, it was held that a contract to supply carriage to a
prostitute to be used by her in the furtherance of her profession was illegal. Similarly, a promise by a man to
pay a woman if she will become his mistress is illegal (Franco v Bolton [1797] 3 Ves 368).

In Malaysia, the above doctrine is codified under s 24(e) of the Contracts Act 1950.

8.12.4 Illegal contracts under the Contracts Act 1950


Section 24(a) and (b) provides that an agreement is void if the object of an agreement is forbidden by law or
if it is of such a nature that, if permitted, would defeat any law. In Lim Kar Bee v Duofortis Properties (M)
Sdn Bhd (1992) 2 MLJ 281, the Supreme Court held that the agreement was void as its object was to defeat
the law. In this case, the parties devised a scheme for the transfer of land with the primary purpose of
avoiding estate duty.

In determining whether a contract is forbidden by law, Gibbs ACJ in the Australian case of Yango Pastoral
Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 proposed that there are four main ways in
which a contract may be unlawful due to contravention of certain statutory provisions:
a) The contract may be to do something which the statute forbids;
b) The contract may be one which the statute expressly or impliedly prohibits;
c) The contract, although lawful on its face, may be made in order to effect a purpose which the statute
renders unlawful; or
d) The contract, although lawful according to its own terms, may be performed in a manner which the
statute prohibits.

Where a contract is made in contravention of some statutory provisions, then in addition to any criminal
sanctions, the courts will, in general, find that the contract is stricken with illegality. However, for this to
occur there must be a sufficient nexus between the statutory requirement and the contract. For example,
construction of a building in breach of building by-law will not invalidate the contract of sale of the property.
A contract is illegal only if the mere making of it is a legal wrong, i.e. if legislation prohibits the making of
such contract.

Some of the examples where such contracts are illegal are:

Agreement to purchase human organs

Agreement to share proceeds from robbery

Agreement to murder or injure someone

Contract to commit a crime

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In Ashton v Turner (1981) QB 137, one of two persons who had agreed to commit burglary together sued the
other for injuries inflicted by the latter when negligently driving the get-away car. The action failed as the
object of the agreement, i.e. robbery, is unlawful and prohibited by law.

8.12.5 Fraudulent Contract


Section 24(c) provides that an agreement whose consideration or object is fraudulent is unlawful and hence
void. For example, an agreement for the division of profits from a fraudulent act such as transfer of property
by forgery is void.

8.12.6 Contracts to injure person or property


Section 24(d) provides that an agreement whose consideration or object involve injury to person or property
of another is unlawful. Therefore if two parties agree to cause physical harm to another or to cause physical
damage to a property belonging to another, the agreement is void and unenforceable.

8.12.7 Contracts that are immoral or against public policy


Section 24(e) provides that an agreement whose consideration or object which is immoral or opposed to
public policy is unlawful. This sub-section codifies the common law rule and is extremely wide in its scope.

Immoral Contract

Immoral contract includes contract whose object is sexually immoral. Some examples are:
a) A contract to hire a vehicle for purpose of prostitution (Pearce v Brooks [1861] All ER 102)
b) A promise by a man to pay a woman money if she will become his mistress (Benyon v Nettlefold
[1850] 3 Mac & G 94)
c) A contract to lease a property for the purpose of prostitution

Contracts that are against public policy

A contract which does not involve the commission of a legal wrong may be illegal because its tendency is to
bring about a state of affairs of which the law disapproves on grounds of public policy. A contract is
regarded as against public policy if it tends to bring about a state of affairs which is considered by law as
harmful to society. What is harmful depends on the circumstances of the case.

Some examples of such contracts are:


a) Agreement by a married person (who is a non-Muslim) to marry another (Spiers v Hunt [1908] 1 KB
720)
b) Agreement interfering with the course of justice, for example where a person promises another
person money for giving false evidence on his behalf in criminal proceeding (R v Andrews [1973] QB
422)
c) Agreements purporting to oust the jurisdiction of the court (s 29 of the Act)
d) Agreements in restraint of trade, profession or business (s 28 of the Act)
e) Agreements entered into for the purposes of avoiding tax (B-Trak Sdn Bhd v Bingkul Timber
Agencies Sdn Bhd [1989] 1 MLJ 124)
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In Jupiter Ltd v Gan Kok Beng (2008) 7 CLJ 715, the defendant engaged in certain gaming activities in the
plaintiffs casino in Australia on several occasions. He suffered gambling losses and issued 6 cheques
amounting to RM 2 million to settle the gambling debt. The cheques were not honoured by the defendant
and the plaintiff sued to recover the debt. The court held that the debt is not recoverable as it contravenes s
31 Contracts Act 1950 and on ground of public policy.

8.12.8 Effect of Illegality


At common law and under the Contracts Act 1950, illegal contracts are void and not voidable. The illegal
contracts include contracts in restraint of marriage, of trade and of legal proceedings. The general rule is
that neither party to an illegal contract can enforce it, and the court will not enforce the contract. As a result,
the parties may not be able to recover any money paid or property transferred under an illegal contract. So,
the promisee will not receive any consideration even though he has performed his part of the bargain. Where
money has already been paid, it is not recoverable by the party who has paid for it. However the above
general rule is not an absolute one and in some cases, the court may be prepared to give to the innocent
party a remedy. The court may take steps to protect an innocent party who has relied to his detriment upon
a contract which he has subsequently discovered to be illegal.

8.13 Void and Voidable Contract


Under English law, a void contract refers to a contract which is void ab initio. That means the contract has
no legal effect as if it never exists at all.

However, the word void used in the Malaysian Contracts Act 1950 has slightly different meaning. Section
2(g) provides that an agreement not enforceable by law is said to be void. That means the contract does
exist but it cannot be enforced by law. Therefore, it appears that no distinction is made in Malaysia between
void contract due to illegality and contract which is void or void ab initio and the parties may not be able to
recover any benefits conferred earlier. Under English law, a contract which is void ab initio merely implies
that no rights or obligations arise from the contract. However, benefits accrued by one party must be
returned to the other party; otherwise the party will be unjustly enriched. In contrast, for an illegal contract
the parties may not be able to recover any benefits given earlier.

In respect to voidable contract, the Contracts Act 1950 codifies English common law rule in which section 2(i)
provides that:
An agreement which is enforceable by law at the option of one or more of the parties thereto, but
not at the option of the other or others, is a voidable contract.

Therefore, a voidable contract is a contract which can be avoided by one party and not the other. The party
who has the right to avoid the contract is generally the innocent party. So, the agreement is valid and
binding to the contracting parties until it is avoided by the party which is entitled to avoid it. Consequently all
rights and obligations existed before the contract is avoided remain intact and enforceable by law.

Under the Act, all contracts procured by coercion, misrepresentation, undue influence and fraud are voidable
contracts and the contract will remain valid until the innocent party opts to avoid it. If the innocent party
chooses not to avoid the contract, then the other party must complete his obligations under the contract

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