Professional Documents
Culture Documents
Undang - Undang Perniagaan
Undang - Undang Perniagaan
Business Law
www.oum.edu.my
INTRODUCTION
BBUN2103 Business Law is one of the courses offered Open University Malaysia
(OUM). This course is worth three credit hours and should be covered over 8 to
15 weeks.
COURSE AUDIENCE
This is a core course for learners pursuing the degree in Bachelor of Management,
Bachelor of Business Administration, Bachelor of Accounting and Bachelor of
Banking and Finance programmes.
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for
every credit hour. As such, for a three-credit hour course, you are expected to
spend 120 study hours. Table 1 gives an estimation of how the 120 study hours
could be accumulated.
Study
Study Activities
Hours
Online participation 12
Revision 15
COURSE SYNOPSIS
This course is divided into 11 topics. The synopsis for each topic can be listed
as follows:
Topic 1 will examine the basic framework of the Malaysian legal system which
includes the classification of law, sources of law and the doctrine of separation of
power in Malaysia. In addition to that, you will learn about the administration of
justice as well as the position of Islamic law in Malaysia.
Topic 2 will introduce you to all the relevant issues involving the essential
elements of a contract and problems arising from a contract which lacks any of
these elements.
Topic 3 will elucidate on the principles regarding void and voidable contracts.
You shall be shown the main differences between these two types of contracts
which have been affected by certain elements and which could, in turn, affect the
validity of a contract. Besides that, you will learn about agreements which are
declared unlawful by the Contracts Act 1950.
Topic 4 will discuss the four ways of how a contract can be discharged and various
types of remedies available to the innocent party when there is a breach of contract.
Topic 5 involves a discussion on agency. You will look at how an agency is created
and the duties and obligations of an agent. Furthermore, you will study the process
involved in the termination of an agency.
Topic 6 emphasises the sale of goods. This topic will focus on the terms applicable,
the concept of transfer of ownership, performance of contract for sale of goods,
rights of the unpaid seller and remedies available in case of a breach.
Topic 7 is on hire purchase. This topic discusses procedures for the formation of
hire purchase agreements, implied terms in such agreements, liabilities of an
owner and seller for misrepresentation, rights and liabilities of the hirer as well as
the procedures involved for repossession by the owner.
Topic 8 moves on to explain the concepts involved in insurance law. Among the
principles of insurance contract which will be discussed are principles of
subrogation, the concept of insurable interests, material facts in the contract, basis
of contract clauses as well as conditions and exception clauses.
Topic 9 covers banking and negotiable instruments. In this topic, the discussions
shall focus on cheques. You shall be familiarised with rules governing different
forms of cheques, crossing and alteration of cheques, provisions protecting the
paying and collecting banker and procedures for termination of bankÊs authority
to make payments.
Topic 10 provides a brief explanation about contracts from the Syariah point of
view, the pillars of a valid contract, the doctrine of khiyar (option) and various
types of Syariah contracts which are commonly used in commercial transactions.
Learning Outcomes: This section refers to what you should achieve after you
have completely covered a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your understanding of the topic.
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should be
able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.
References: The References section is where a list of relevant and useful textbooks,
journals, articles, electronic contents or sources can be found. The list can appear
in a few locations such as in the Course Guide (at the References section), at the
end of every topic or at the back of the module. You are encouraged to read or
refer to the suggested sources to obtain the additional information needed and to
enhance your overall understanding of the course.
PRIOR KNOWLEDGE
No prior knowledge required.
ASSESSMENT METHOD
Please refer to myINSPIRE.
REFERENCES
Abdullah Alwi Hassan. (1992). Sales and contracts in early Islamic commercial
law. Islamabad, Pakistan: Islamic Research Institute, International Islamic
University.
Ahmad Hidayat Buang. (2000). Studies in Islamic law of contracts: The prohibition
of gharar. Kuala Lumpur, Malaysia: International Law Book Services.
Lee, M. P., & Samen, D. (1997). Commercial law in Malaysia. Kuala Lumpur,
Malaysia: Malayan Law Journal.
Niazi, L. A. (1991). Islamic law of contract. Lahore, Pakistan: Research Cell, Dyal
Sing Trust Library.
S. Kanesh. (2000). General paper. Kuala Lumpur, Malaysia: Malayan Law Journal.
Vohrah, B., & Wu, M. A. (2000). The commercial law of Malaysia. Kuala Lumpur,
Malaysia: Longman.
Wan Arfah Hamzah, & Ramy Bulan. (2003). An introduction to the Malaysian
legal system. Kuala Lumpur, Malaysia: Penerbit Fajar Bakti.
INTRODUCTION
According to Wu (2003) Malaysia is a pluralistic country which comprises three
main ethnic groups, namely, the Malays and other communities such as the
Chinese and Indians. The country also has minority groups, which include the
Eurasians and Europeans. The term Bumiputera which means „sons of the soil‰
is also used for the Malays, aboriginal people in the Peninsular Malaysia and
natives of Sabah and Sarawak such as the Ibans, Kadazans and Muruts. The
political practice in Malaysia is mainly shaped by ethnology and race.
Wu (2003) also states that the Malaysian legal system was determined by events
which happened within a period of 600 years within three major periods; namely
the founding of the Malacca Sultanate in the 15th Century, the spread of Islam to
Southeast Asia and the era of British colonialism. In the 1890s, upon establishing
its power in the Malay States, the British discovered that the economic progress of
the Malay States was slow compared to the Straits Settlement (Sharifah Suhanah
Syed Ahmad, 2007). The Malays were found to be involved mostly in fishing and
as padi planters and were not interested to work for others for wages.
The Chinese employers preferred to employ their own people whilst the European
employers found that the Malays were not sufficient in number or cheap enough
for their needs (Parmer, 1960). Consequently, the British government embarked on
a policy which actively encouraged foreign immigration to Malaya. The policy
assisted immigration of foreign labour, particularly from India whilst the Chinese
labour largely entered Malaya unassisted.
Constitutional law lays down the rights of individuals in the State. It deals
with questions such as supremacy of Parliament and the rights of citizens.
It also covers areas dealing with state and federal powers.
International law can be subdivided into public international law and private
international law. The former is the law that prevails between States whereas
private international law is part of municipal law, as a result of which in
every country there will be different versions. It consists of the rules that
guide a judge when the laws of more than one country affect a case.
ACTIVITY 1.1
(a) Historical sources, indicating the factors that have been influential in the
development of the law but by them not recognised as law. Examples of these
factors that influence the development of the law are religious practices and
beliefs, local customs and opinions of jurists.
(b) It may also refer to places where the law can be found, for example, in
statutes, law reports, textbooks and decisions of courts.
(c) In most cases, however, it refers to legal sources, that is, the legal rules that
makes up the law.
(i) The Federal Constitution, which is the supreme law of the land,
together with the respective constitutions of the thirteen states
comprising the Federation;
(ii) Legislation enacted by Parliament and the State Assemblies under the
powers conferred to them by the respective constitutions; and
(ii) Judicial decisions of the superior courts, that is, the High Court, the
Court of Appeal and the Federal Court;
(iv) Customs of the local inhabitants which have been accepted as law by
the courts.
These laws are regarded as personal laws, applying only to a specific race or
religion and except for Islamic law, they are generally in decline. They are
being increasingly replaced by statute law, for example, non-Muslim
customary law relating to marriage has been replaced by a uniform law, that
is, the Law Reform (Marriage and Divorce) Act 1976.
These documents do not have the status of law but assist the understanding
of the reality of Malaysian law today and to interpret the historical
perspective of the law.
SELF-CHECK 1.1
1. What do you think are the most important sources of written law
in Malaysia?
„This Constitution is the supreme law of the Federation and any law passed
after Merdeka Day which is inconsistent with this Constitution shall to the
extent of the inconsistency be void‰.
Although Malaysia has a Parliament which passes all laws of the country, the
power of the Parliament is limited by the Constitution. The Parliament is not
supreme. There are procedural and substantive limits on ParliamentsÊ powers.
State Assemblies are also limited in their legislative competence. Courts have the
power to nullify federal and state legislation if there is inconsistency with the
supreme Constitution. According to Suffian L. P. in Ah Thian v. Government of
Malaysia (1976) 2 MLJ 112:
The Supremacy of the Constitution is maintained by giving the courts the right to
review legislative and executive acts. When a legislative or executive act violates
the constitution, the court may declare it ultra vires and void. The Constitution is
amendable by a separate process different from that of ordinary legislation. Some
provisions affecting prerogatives of the State Rulers require special federal
parliamentary procedures and the consent of the Conference of Rulers.
ACTIVITY 1.2
State Legislation
In the Federal System of Malaysia, State Legislatures have the power to frame
enactments on 13 topics in the State list and 12 topics in the concurrent list.
In addition, the State Legislatures have the power to amend the State Constitution.
All State enactments are subject to the Federal Constitution and the StateÊs own
constitution. There are several instances of State Legislation being invalidated
by the courts on constitutional grounds.
1.7 FEDERATION
Malaysia is a Federation, with a strong central government (Federal Government)
and thirteen State Governments. The power to make laws for the country is
divided between the Federal Government and the various State Governments in
accordance with Part VI of the FC. Article 74(1) provides that Parliament may
make laws with respect to any of the matter enumerated under the Federal List or
Concurrent List whilst Article 74(2) provides that the legislature of a State may
make laws with respect to any of the matters enumerated is the State Lists or
Concurrent List in the Ninth Schedule, without prejudice to any power to make
laws conferred on it by any other Article.
The Federation has power and control over subject matters which can be
considered essential and vital to the nation as a whole. Table 1.1 shows matters in
the Federal List, State List and Concurrent List which are under the power and
control of the Federation.
According to Article 44, the legislative authority of the Federation „shall be vested
in a Parliament‰ which is bicameral; the Dewan Rakyat (House of Representatives)
and Dewan Negara (Senate). Parliament may make laws for the whole or any part
of the Federation as provided in Article 73, which states that:
(a) Parliament may make laws for the whole or any part of the Federation and
laws having effect outside as well as within the Federation; and
(b) The Legislature of a State may make laws for the whole or any part of the
State.
States may not make laws on federal matters unless specifically so authorised by
Parliament; the latter may legislate on subjects enumerated in the State List. Article
76(1) provides three instances for the legitimate exercise of federal authority in
State matters namely:
(a) Where the government has committed itself to an international treaty or any
decision of an international organisation of which the country is a member
and it is necessary to make laws for the purpose of implementing such a
treaty or decision. This excludes matters of Islamic law, Malay customs and
native law and customs in Sabah and Sarawak until there is prior
consultation with the States.
(b) Laws may be made for the purpose of promoting uniformity of the laws of
two or more States.
(c) Where the State Legislative Assembly has requested Parliament to do so.
Federal laws made under (b) and (c) cannot come into operation until adopted by
the State Legislative Assembly. They will then be considered State laws which may
be later amended or repealed by the States.
The YDPA is the Head of State much like the Queen of the United Kingdom and
the government is carried out in his name. The office of YDPA is both hereditary
and elective. It is hereditary in a broad sense in that only the nine Ruler of the
States are eligible for election.
The four other heads of the States of Penang, Malacca, Sabah and Sarawak are not
eligible for election as they are not hereditary rulers but appointed from among
prominent citizens. It is also elective in the sense that one of the nine Rulers is
elected from basics. A deputy king is known as Timbalan Yang di-Pertuan Agong
and is also elected in the same manner. The YDPA may be removed from office by
his fellow Rulers assembled in a Conference of Rulers.
In the exercise of his functions under the Constitution or Federal Law, the YDPA
has to act in accordance with the advice of the Cabinet or of a minister acting under
the general authority of the Cabinet. Most of the functions and duties of the YDPA
are ceremonial in character. He is, for example, the designated Supreme
Commander of the armed forces of the Federation.
However, the YDPA has the power to grant pardons, reprieves and respites in
respect of all offences which have been tried by court-martial and all offences
committed in the Federal Territories of Kuala Lumpur, Labuan and Putrajaya.
In this regard, the YDPA is assisted by a Pardon Board, which consists of the
Attorney General, the Chief Territories of Kuala Lumpur, Labuan and Putrajaya,
and not more than three other members appointed by the Rulers (in the case of
a State) or the YDPA.
The rulers and the YDPAÊs immunity from prosecution has been removed, and it
is now provided under a new Article 33A where the YDPA has been charged with
an offence under any law in the Special Court established under Part XV of the
Federal Constitution, he shall cease to exercise the function of the YDPA.
(c) Consenting or withholding consent to any law and making or giving advice
on any appointment which requires the consent of the Conference;
(d) Appointing members of the Special Court under Clause (1) of Article 182;
and
The Malay Rulers may deliberate on questions of national policy (for example
changes in immigration policy) and any other matters that they think fit. Among
the matters which require either the consent of the Conference of Rulers or its prior
consultation include the passing of any law affecting the privileges, position,
honours or dignities of the Rulers and any changes in policy affecting
administrative action under Article 153, that is, reservation of quotas in respect of
services and permits for Malaysia and natives of any of the States of Sabah and
Sarawak.
The Conference of Rulers also deliberates on matters of national policy upon which
it must be attended by the YDPA and the Prime Minister as representatives of the
Federal Government, the Rulers and Yang di-Pertua each of whom is accompanied
by his Menteri Besar or Chief Minister. At the meeting, His Majesty the King
(YDPA) acts on the advice of the Prime Minister on behalf of the Cabinet and the
other Rulers and Yang di-Pertua Negeri in accordance with the advice of their
respective Executive Councils (State Cabinets).
Ministers other than the Prime Minister hold office at the pleasure of the
YDPA. This does not mean that the YDPA may dismiss them at will. He may
do so only on the Prime MinisterÊs advice. Deputy Ministers are appointed
by the YDPA on the advice of the Prime Minister to assist Ministers.
The YDPA is an integral part of Parliament and his assent is required for all
laws except as otherwise provided in Article 66. As a constitutional monarch,
His Majesty the King (YDPA) attends ceremonial occasions such as the
opening of Parliamentary sessions and delivers the Royal Address to the joint
sitting of both the chambers outlining government policies.
The power to summon, prorogue or dissolve Parliament lies with the YDPA,
and he shall not allow six months to elapse between the last sitting and the
date appointed for its first meeting in the next session. When Parliament is
dissolved, a general election must be held within 60 days from the date of the
dissolution, and Parliament must be summoned to meet on a date not later
than 120 days from the date [Article 55(4)].
Parliament does not enjoy legislative supremacy like its British counterpart,
which has no written constitution. The British Parliament can make and
unmake any law it likes and validity of such acts cannot be successfully
challenged in the courts, which are bound to accept them as law. In contrast,
the Malaysian Parliament owes its very existence to a written Constitution
Copyright © Open University Malaysia (OUM)
18 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM
and is governed by it. In the event of a conflict between the Constitution and
Act of Parliament, the Constitution shall prevail. Parliament is empowered
to amend the Constitution but any changes must be effected in accordance
with the provisions of the Constitution.
They may be dismissed from the service by the YDPA only on valid grounds of
misbehaviour or of unsound body and mind or any other cause. They can be
removed from office only on the recommendation of a tribunal consisting of at
least five persons who hold or have held office as judge of the Federal Court or of
the Court of Appeal and the Chief Judges on the High Courts. The procedure for
removing a judge is given in Article 125 (3), (4) and (5) of the Constitution.
Salaries and other benefits of office of the Judges are provided by the Constitution
in Acts of Parliament and they are charged directly on the consolidated fund and
not through the annual parliamentary approvals. The Act fixing the remuneration
may of course be amended, but the amendment would be constitutional if it
altered a judgesÊ remuneration to his disadvantage after his appointment. Judges
retire at the age of 65 or a later time, not later than six months after that age as the
YDPA may approve.
Although the number of judges that may be appointed is fixed by the Constitution,
it may be varied by the YDPA and such variations have in fact been made from
time to time. His Majesty the King, acting on the advice of the Prime Minister, after
consulting the Conference of Rulers appoints the Chief Justice of the Federal Court,
the President of the Court of Appeal and Chief Judges of the High Court, of the
Court of Appeal and of the High Courts. In appointing the High Court Judges the
Prime Minister consults the respective Chief Judges as a matter of procedure and
as required by the Constitution.
Besides the judges, the Judicial Commissioners too are appointed by the YDPA on
the advice of the Prime Minister, after consulting the Chief Justice of the Federal
Court for such period or such purposes as may be specified in the order. The main
purpose of appointing Judicial Commissioners is to ease periodic heavy workloads
in the High Courts. Judicial Commissioners possess the same powers and
immunities a High Court Judge and are required to have the same minimum
qualifications.
The Sessions Court Judge is a legally qualified person and is a member of the
Judicial and Legal Service of the Federation. A magistrateÊs court consists of a
magistrate sitting alone. There are two classes of magistrates namely First Class
Magistrate and Second Class Magistrate. The first is often a legally qualified
person appointed by the YDPA or the State Authority on the recommendation of
the Chief Judge. The second is usually an administrative officer who performs
magisterial functions and is appointed by the YDPA or the State Authority.
The Malaysian judiciary, apart from the Syariah Courts, is entirely a federal
organisation. It adopts a three-tier superior court system (refer to Figure 1.4). At
the apex of the organisation of the court structure is the Federal Court (Mahkamah
Persekutuan), which is the highest and the final appellate court in Malaysia. The
Federal Court, which has its principal registry in Kuala Lumpur, shall have, by
virtue of Article 121(2), the following jurisdiction:
The Federal Court consists of a president of the court (to be styled the „Chief
Justice of the Federal Court‰), the President of the Court of Appeal, the Chief Judge
of the High Court in Malaya, the Chief Judge of the High Court in Sabah and
Sarawak and seven other Federal Court Judges. The proceedings before the
Federal Court will be heard and disposed of by a panel of three judges, or such
greater uneven number of judges as nominated by the Chief Justice.
The Court of Appeal (Mahkamah Rayuan) was established in 1994 and has its
principal registry in Kuala Lumpur. The Court of Appeal consists of a chairman
(to be styled the „President of the Court of Appeal‰) and ten other judges. The
jurisdiction of the Court of Appeal is limited only to appellate jurisdiction, both in
criminal and civil appeals. Sections 50(1) and 67(1) of the Courts of Judicature Act
1964 (Act 91) provide for the jurisdiction to criminal and civil appeals.
Below the Court of Appeal, there are two High Courts of equal and coordinate
jurisdiction and status, namely the High Court of Malaya, which has its principal
registry in Kuala Lumpur, and the High Court of Sabah and Sarawak, which has
its principal registry at such places in the States of Sabah and Sarawak as the YDPA
may determine. By virtue of Article 122AA of the Constitution, the Chief Judge of
Malaya (formerly known as Chief Justice of Malaya) and the Chief Judge of Sabah
and Sarawak (formerly known as the Chief Justice of Borneo) are respective heads
of the High Court in Malaya and the High Court in Sabah and Sarawak.
By virtue of their office, the Chief Judges are members of the Federal Court and
the heads of the Subordinate courts in their respective territories.
One such function is that, he must be present to witness the oath-taking ceremony
by the YDPA and the Deputy YDPA, as provided by Article 37 of the Constitution.
He deals directly with the Prime Minister on matters related to the judiciary and
matters pertaining to the administration of justice in the country. The Chief Justice
also exercises other constitutional functions.
As early as 1906, when the Appeals Order in Council was passed, all appeals from
the Court of Appeal (then the highest appellate court) of the Federated Malay
States were referred to the Judicial Committee of the Privy Council. The first
reported Privy Council appeal from the Straits Settlements is the case of Yeap
Cheah Neo v. Ong Cheng Neo (1875) SLR PC 381. Since then, the court structure
in Malaysia varied from time to time. Figures 1.5, 1.6 and 1.7 indicate the structure
of the Malaysian Courts at different stages after Independence.
Figure 1.5: Structure of the Malaysian courts at different stages (prior to 1985)
On Merdeka Day, 31 August 1957, the right to appeal from the Supreme Court of
Malaya to the Privy Council was maintained and embodied in Article 131 of the
Federal Constitution. With the formation of Malaysia, the practice was continued.
Thus appeals originating from Malaysia, an independent country with its own
sovereignty, were to be heard by Judges in England. This was subject to the
provision that these appeals were addressed not directly to the Privy Council but
to His Majesty the King (YDPA) who, in turn, would refer the matter for advice to
the Privy Council. Therefore, technically the judgment delivered by the Privy
Council was by way of advice to the YDPA.
Figure 1.6: Structure of the Malaysian courts at different stages (between 1985 to 1995)
Figure 1.7: Structure of the Malaysian courts at different stages (current structure)
The gradual erosion of the right of appeal to the Privy Council began in 1975, when
a law was introduced to provide that any decision of the Federal Court in criminal
cases tried under the Essential (Security Cases) Regulations 1975 was made
non-appealable to the Privy Council. Subsequently in January 1978, appeals to the
Privy Council in criminal and constitutional matters were abolished. Finally, with
effect from 1 January 1985, all appeals to the Privy Council were totally abolished.
The Malaysian Judiciary, except for the Syariah Courts, is entirely a federal
organisation. At the apex of the judiciary is the Federal Court, (previously called
the Supreme Court) which is now the highest court and the final appellate body in
Malaysia. Next in status and jurisdiction is the Court of Appeal, followed by the
High Courts. Below the High Courts are the subordinate courts, which comprise
the Sessions Court and MagistrateÊs Court, in descending order.
With the re-institution of the three-tiered structure of appeal, the current Court of
Appeal occupies the position previously held by the Federal Court, while the
Federal Court now occupies the position of the highest Court of Appeal in
Malaysia previously held by the Privy Council.
(1) There shall be a court which shall be known as the Special Court and shall
consist of the Chief Justice of the Federal Court, who shall be the Chairman,
the Chief Judges of the High Courts and two other persons who hold or have
held office as judge of the Federal Court or a High Court, appointed by the
Conference of Rulers.
(2) Any proceedings by or against the Yang di-Pertuan Agong or the Ruler of a
State in his personal capacity shall be brought in a Special Court established
under Clause (1).
(3) The Special Court shall have exclusive jurisdiction to try all offences
committed in the Federation by the Yang di-Pertuan Agong or the Ruler of a
State and all civil cases by or against the Yang di-Pertuan Agong or the Ruler
of a State notwithstanding where the cause of action arose.
The Special Court does not form part of the judicial system as this court is just a
constitutional Court.
Copyright © Open University Malaysia (OUM)
26 TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM
The Federal Court shall, to the exclusion of any other Court, have jurisdiction to
determine in accordance with any rules of Court regulating the exercise of
such jurisdiction:
(b) Disputes on any other question between States or between the Federation
and any State.
In the event of any dispute on any other questions between the States or between
the Federation and any States, which is brought to the Federal Court for
declaration, in exercise of its jurisdiction under Article 128(1)(b) the Federal Court
should pronounce only a declaratory judgment. Such declaratory judgment is well
illustrated in Dewan Undangan Negeri Kelantan & Anor. v. Nordin bin Salleh &
Anor. [1992] 1 MLJ 697.
In that case the respondents, members of the Kelantan State Legislative Assembly,
sought a declaration that Article XXXIA of the Kelantan Constitution was invalid
as it contravened Article 10(1)(c) of the Federal Constitution guaranteeing the
fundamental right to freedom of association. On appeal the Supreme Court held
that the provision contained in the Kelantan State Constitution imposing a
restriction on the rights of the member of the Kelantan state Legislative Assembly,
was unconstitutional on the ground that it contravened Article 10(1)(c) of the
Federal Constitution.
Where in any proceedings in the High Court if a question arises to the effect of any
provision of the Constitution, the Judge hearing the proceedings may stay the
same on such terms as may be just to await the decision of the question by the
Federal Court.
As regards to proceeding in the Federal Court, Section 85 of the above Act provides
as follows:
(1) Where a special case has been transmitted to the Federal Court under section
84, the Federal Court shall, subject to any rules of court of the Federal Court,
deal with the case and hear and determine it in the same way as any appeals
to the Federal Court.
(2) When the Federal Court shall have determined any special case under this
section, the High Court in which the proceedings in the course of which the
case has been stated are pending shall continue and dispose of the
proceedings in accordance with the judgment of the Federal Court and
otherwise according to the law.
In civil matters, the Court of Appeal has jurisdiction to hear and determine appeals
from any judgment or order of any High Court whether made in exercise of its
original or appellate jurisdiction. There are, however, several matters, which are
non-appealable to the Court of Appeal. Section 68(1) of the Courts of Judicature
Act 1964 provides as follows:
Section 68(1): No appeal shall be brought to the Court of Appeal in any of the
following cases:
(a) Where the amount or value of the subject matter of the claim (exclusive of
interest) is less than RM250,000 except with leave of the Court of Appeal;
(b) Where the judgment or order is made by consent of the relevant parties;
(c) Where the judgment or order relates to costs only which by law are left to the
discretion of the Court, except with leave of the Court of Appeal; and
(d) Whereby any written law for the time being in force, the judgment or order
of the High Court is expressly declared to be final.
Copyright © Open University Malaysia (OUM)
TOPIC 1 INTRODUCTION TO THE MALAYSIAN LEGAL SYSTEM 29
Section 22(1) of the Courts of Judicature Act 1964 provides additional criminal
jurisdiction to the High Court as follows:
(a) Offences under Chapter VI of the Penal Code and under any of the written
laws specified in the Schedule to the Extra Territorial Offences Act 1976 or
offences under any written law, the commission of which is certified by the
Attorney-General to affect the security of Malaysia committed, as the case
may be;
(b) On the high seas on board any ship on aircraft registered in Malaysia;
offences by any ship or aircraft registered in Malaysia;
(c) By any citizen or any permanent resident on the high seas on board any ship
or aircraft; or
(d) By any citizen or any permanent resident in any place without and beyond
the limits of Malaysia.
In general, civil jurisdiction of the High Court includes that of trying all civil
proceedings where the cause of action arose within the local jurisdiction of the
court, or the defendant or one of several defendants resides or has his place of
business within such local jurisdiction, or the facts on which the proceedings are
based exist or are alleged to have occurred, or any land, the ownership of which is
disputed is situated within the local jurisdiction of the court.
The specific civil jurisdiction of the High Court is provided by Section 24 of the
Courts of Judicature Act 1964 as follows:
Without prejudice to the generality of Section 23, the civil jurisdiction of the High
Court shall include:
(a) Jurisdiction under any written law relating to divorce and matrimonial
causes;
(d) Jurisdiction to appoint and control guardians of infants and generally over
the person and property of infants;
(e) Jurisdiction to appoint and control guardians and keepers of the person and
estate of idiots, mentally disordered person and persons of unsound mind;
and
The High Court shall, in the exercise of its jurisdiction, have all the powers which
were vested in it immediately prior to Malaysia Day and such other powers as may
be vested in it by any written law in force within its local jurisdiction. The High
Court hears both criminal and civil law appeals.
However, no appeal shall lie to the High Court from a decision of a subordinate
court in any civil course or matter where the amount in dispute or the value of the
subject matter is RM10,000 or less except on a question of law. An appeal shall lie
from any decisions of a subordinate court in any proceedings relating to
maintenance of wives or children, irrespective of the amount involved.
The High Court is vested with special powers of revision of both criminal and civil
proceedings. The High Court may call for examination of the record for any civil
proceedings before any subordinate courts for the purpose of satisfying itself as to
the correctness, legality or propriety of any decision recorded or passed and as to
the regularity of any proceedings of any such subordinate court.
In addition, the High Court is provided with general supervisory and revisionary
jurisdiction over all subordinate court, and may in particular if it appears desirable
in the interests of justice, either of its own motion or at the instance of any party or
person interested, at any stages in any matters or proceedings, whether civil or
criminal, in any subordinate courts, call for the record thereof. It may remove the
same into the High Court or may give to the subordinate court such direction as
to the further conduct of the same as justice may require.
(i) Unlimited jurisdiction to try all actions and suits of a civil nature in
respect of motor vehicle accidents, landlords and tenants, and distress;
(ii) Jurisdiction to try all actions and suits of a civil nature where the
amount in dispute or the value of the subject matter does not exceed
RM1,000,000; and
(iii) Jurisdiction to try all actions and suits of a civil nature for the specific
performance or rescission of contracts as well as the cancellation or
rectification of instruments.
However, there are also exceptions. The Sessions Court has no jurisdiction in
actions, suits or proceedings in the following matters (Section 69 of the SCA):
(iv) For the issuance and revocation of grants regarding the representation
of the estates of deceased persons or the administration, or distribution
thereof;
The civil jurisdiction limit of the Sessions Court has been increased significantly
under the Subordinate Courts (Amendment) Act 2010 [Act A1382) from the
previous jurisdiction of RM250,000. The Amendment Act came into force on 1
March 2013. The amendment also empowered the Sessions Court to grant
equitable relief and remedies such as injunctions, specific performance,
declaratory relief, rescission of contracts and cancellation or rectification of
instruments, provided that the claim is within its stipulated monetary jurisdiction.
Prior to 1 March 2013, only the High Court is vested with all these powers.
First Class Magistrate and Second Class Magistrate Courts only have original
jurisdiction. Before 1 March 2013, the First Class Magistrate Court has both the
original and appellate jurisdictions. It hears appeals from the PenghuluÊs Court.
Effective from 1 March 2013, the PenghuluÊs Court has been abolished by the
Amendment Act 2010 (Act A1382).
(iii) Are under Sections 392 and 457 of the Penal Code.
Section 392 of Penal Code deals with robbery, while Section 457 of the Penal
Code deals with trespassing and housebreaking as offences.
Under Section 87 of the SCA, a First Class Magistrate may pass any sentence
allowed by law but not exceeding:
However, for any law which is currently in force, jurisdiction is given to the
MagistratesÊ Courts to award punishment for any offence in excess of the
power prescribed by this Section. A First Class Magistrate may,
notwithstanding anything herein contained in Section 87 (1) SCA, award the
full punishment authorised by that law and record the reason for doing so.
The civil jurisdiction limit of a First Class Magistrate has been increased from
the previous RM25,000 under the Subordinate Courts (Amendment) Act
2010 [Act A1382]. The Act came into force on 1 March 2013.
A Second Class Magistrate may pass any sentence allowed by law as follows:
Sections 26−28 Court of Judicature Act 1964 states that appeals in criminal
and civil cases against decisions of the Magistrates Courts lie with the High
Court. In a civil case, the disputed amount must be RM10,000 or less, with
the exception that it is a question of law. This monetary limit is not applicable
to proceedings regarding the maintenance of wife (wives) or children.
Second Class Magistrates may try the entire small claims. The ceiling for
small claims is RM5,000 which also include any other claims other than debts
such as damages. This is a mandatory procedure if the recovery of the claim
is below RM5,000. The procedure for small claims is provided for under
Order 93 Rules of Court 2012. The claimant needs to comply with all the
requirements set therein.
This Special Court has the exclusive jurisdiction to try all offences committed in
the Federation by the YDPA notwithstanding where the cause of action arose.
However, no action, civil or criminal shall be instituted against the YDPA in
respect of anything done or omitted to be done by him in his personal capacity
except with the consent of the Attorney General. The YDPA has certain
discretionary powers. Clause (2) of Article 40 states:
The YDPA may act in his discretion in the performance of the following functions,
that is to say:
(b) The withholding of consent to request for the dissolution of Parliament; and
SELF-CHECK 1.2
The sources of Syariah law as applied in Malaysia come from two main categories:
(ii) Sunnah: Rules deduced from the saying or conduct of the Prophet
Muhammad SAW.
According to some legal experts, Articles 3(1) does not declare that the Federation
is an Islamic state. The clause has no any legal effect. This can be seen in the case
of Che Omar Che Soh v. Public Prosecutor (1988), in which it was argued that
mandatory death penalty for drug trafficking offences was contrary to Syariah law.
The Supreme Court rejected the argument. Salleh Abas L.P held that Article 3 was
never intended to extend the application of Syariah to the sphere of public law.
In other words, we can say that Syariah law is only confined to private or personal
law and not to public law. Nevertheless, Article 3 does give a special status to the
religion of Islam. This can be seen in the following Articles:
(iii) To act as a trustee to all mosque, waqf (gift for religious purpose) and
all trusts;
(iv) To act as the executor of a will and administer the estate of a deceased
Muslim; and
The main function of the mufti is to make and publish in the Gazette a fatwa
(legal ruling) on any unsettled or controversial issues concerning Islamic law.
Upon publication in the Gazette, the fatwa is binding on all Muslims. The
fatwa also is recognised as authoritative by all courts in the state or territory
concerned.
Since Syariah Courts and Islamic law are state matters, there is no uniformity in
the administration of Syariah courts or of Islamic law throughout Malaysia. This
can be seen from variations in the structure of Syariah Court itself. However,
for the purpose of our discussion, we will look at the three-tier structure of
Syariah Court because this structure has been used by most of states. The following
figure is the hierarchy of Syariah Court in Federal Territories which is based on
the three-tier structure.
Each court has different jurisdictions. However, we are not going to discuss the
jurisdictions in detail. What we can summarise is that Syariah courts have limited
civil jurisdiction as it relates to the MuslimÊs personal law and family only. As for
criminal matters, Syariah courts shall not have jurisdiction in respect of offences
except in so far as conferred by federal law. Parliament has enacted the Syariah
Courts (Criminal Jurisdiction) Act 1965 which confers a limited criminal
jurisdiction upon the Syariah courts. By virtue of this act, the punishments that can
be imposed by the Syariah Court for criminal offences are as below:
Another important provision relating to Syariah court is Article 121 (1A) of the
Federal Constitution. This article provides that the High Courts and courts
subordinate to it shall have no jurisdiction in any matter which is in the jurisdiction
of Syariah court. Thus, civil courts cannot interfere in matters related to Islamic
law.
EXERCISE 1.1
1. Advise which court has the jurisdiction to hear the following cases:
(a) Jason was involved in an accident and would like to claim for
special and general damages amounting to RM200, 000.
(b) Daniel is charged under Section 302 of the Penal Code for
murdering his girlfriend, an offence punishable with a death
penalty.
(c) Leman and Joyah were caught for close proximity (khalwat).
• According to common law, law can be classified into three broad divisions.
The divisions are public law, international law and private law.
• The most important source of law in Malaysia is the written law which consists
of the Federal Constitution, State Constitution, legislation and subsidiary
legislation.
• Federal Constitution is the supreme law of the land. Any law inconsistent
with the Federal Constitution may be challenged in court.
• Islamic law is recognised as one of the sources of the Malaysian law but it is
applicable only to Muslims. It is also administered by a separate system of
Syariah courts (Islamic courts) at state levels and in the Federal Territories of
Kuala Lumpur and Labuan. The Federal Constitution Ninth Schedule, List II
only enumerates personal and family law of persons professing Islam as a
state matter, thus placing them within the jurisdiction of the Syariah courts.
• Malaysia adopts the principle of separation of powers and has there three
organs of government namely, executive, legislature and judiciary.
Lee, M. P. (2005). General principle of Malaysian law (5th ed.). Shah Alam,
Malaysia: Penerbit Fajar Bakti.
Rau, & Kumar. (2005). General principles of the Malaysian legal system. Petaling
Jaya, Malaysia: International Law Book Services.
Sharifah Suhana Syed Ahmad. (2007). Malaysian legal system (2nd ed.). Kuala
Lumpur, Malaysia: Malayan Law Journal Sdn. Bhd.
Wan Arfah Hamzah. (2009). A first look at the Malaysian legal system. Shah Alam,
Malaysia: Oxford Fajar Sdn. Bhd.
INTRODUCTION
In this topic, you will be introduced to the laws which govern the formation of a
contract in Malaysia. You should understand the definition of a contract and each
basic element in the formation of a contract, which is made up of the offer,
acceptance, consideration, capacity, intention and certainty. You will not only find
Malaysian Acts and cases applied in the discussions, but also those from England,
India and Singapore. These facts are necessary to support your answers during the
examination. With a clear understanding of all the points above, you should be
able to complete all the exercises given in this topic.
However, it must be noted that these English laws are only adopted as persuasive
authority and does not bind the decisions of the Malaysian courts. Furthermore,
the application of English laws shall only be made if there is a lacuna in the local
laws and insofar as it suits the circumstances and situation prevailing in Malaysia
(as far as it does not contradict the local circumstances). For further understanding,
you need to refer to Sections 3 and 5 of the Civil Laws Act 1956.
Besides English Law, Indian cases will also be referred to in certain topics.
In certain cases, the Malaysian Courts referred to the Indian Contracts Act as
the Malaysian CA 1950 was taken from the Indian CA 1950. Thus, there are
many similarities in the provisions of both the Indian and our Contracts Act of
1950. In interpreting the provisions of the CA 1950, the Malaysian Courts referred
to Indian cases.
Actually, a person goes around with a binding contract almost daily without her
or him even realising it. For example, when you go to a shop to buy something,
you make a contract with the shopkeeper, or when you board a bus or park your
car at the parking lot, you make a contract with the bus company or the car park
operator.
The definition of „contract‰ in the CA 1950 as seen below may help you
understand the term better.
Definition
Section 2(h): „an agreement enforceable by law is a contract‰.
You need to ensure that any agreement made is valid for it to be enforceable in law
as a binding contract. If any agreement made is not enforceable, the parties
involved will not obtain any redress from the court for any damages suffered. This
is based on Section 2(g) which states that „an agreement not enforceable by law is
said to be void.‰
Definition
You have to refer to Section 10(1) which states that „all agreements are
contracts if they were 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‰.
SELF-CHECK 2.1
You must have heard of the word „contract‰ in your daily life. What is
„contract‰ under the law?
Element Explanation
Offer When a person signifies his willingness to enter into a contract with
another person.
Acceptance When a person to whom an offer has been made, accepts the offer
made.
Capacity Each contracting party must have the capacity to enter into a contract.
Such person must have reached the age of majority according to the
Age of Majority Act 1971 and be of sound mind at the time when the
contract is made.
Intention Each party which enters into a contract must have the intention to
create legal relations – that they are to be bound by the obligations
under the contract.
Free consent A person is deemed not to freely consent to enter into a contract if he
is influenced by coercion, undue influence, fraud, misrepresentation
and mistake when entering into the contract. These will be discussed
in detail in Topic 3, that is, voidable contracts.
Certainty A contract must contain conditions which are clear in meaning and not
vague.
Valid object A contract made must be for matters which are not against the law.
This will also be discussed in detail in Topic 3.
The term „offer‰ is also referred to as proposal. It is defined under Section 2(a) CA
1950 as:
There is no need to memorise the entire words in the definition; you only have to
know the meaning of the section. It defines that an offer can only exist when an
offeror or promiser, by his act or words, states his willingness to be bound by the
contract as soon as the other person to whom he made the proposal accepts it.
Example: Ahmad told Bakar that he is willing to sell his computer to Bakar for
RM2,000. In this situation, Ahmad has made an offer to Bakar.
(a) An Individual
As in the example of Ahmad and Bakar where Ahmad made the proposal
only to Bakar.
Do try to distinguish the example shown in (c) from the following scenario. Bob
advertised in the newspaper to find a skilled worker to work as a sales manager in
his company. In this context, Bob does not intend to be bound with each
application received for the said job, even if each applicant has fulfilled the criteria
listed by him. Bob is only said to make an invitation to treat as the real offer comes
from the applicants.
Any statement made for the purpose of giving information cannot be deemed as
an offer. This is clarified in the case of Harvey v. Facey [1893].
In this case, A telegraphed B „Will you sell us a Bumper Hall Pen? Telegraph
lowest cash price‰. B replied by telegram „Lowest price for a Bumper Hall Pen is
£900. A telegraphed B ‰We agree to buy a Bumper Hall Pen for the price of £900
as you wish‰. A claimed that a contract existed because there was an offer and an
acceptance. But the Court decided that in the telegram, B only supplied
information and did not make an offer. However, A, in his second telegraph made
the offer. Therefore, it did not constitute a contract.
ACTIVITY 2.1
Figure 2.1: Situations where there are intention for an invitation to treat
The Court decided that there was a binding contract when the offer made, by
his application to fill up the vacancy, was accepted by the Public Service
Commission since it was not stated that Coelho would be on probation when
he signed for the job. Therefore, the dismissal was not valid and in breach of
an existing contract.
However, it must be noted that there is an exception to the general rule that
an advertisement is an invitation to treat. There are situations where an
advertisement made will still be categorised as an offer and not an invitation
to treat. The paragraph below presents a case related to this situation.
Let us look at the decision made by the Court in the case of Carlill v. Carbolic
Smoke Ball Co. (1893). The defendant, Carbolic Smoke Ball Co. issued an
advertisement in which they offered to pay £100 to any person who
succumbed to influenza after having used one of their smoke balls in a
specified manner and for a specified period. The plaintiff, Mrs. Carlill,
bought and used the smoke balls as prescribed but still succumbed to
influenza. The plaintiff sued the company for the promised £100. The Court
of Appeal held that the plaintiff was entitled to the £100 because she had
made an acceptance to the defendantÊs offer to the entire world by
performing all the conditions stated in the advertisement.
It should be noted that, in this case, there was an intention by the defendant
to be bound by the contract upon acceptance by their act of depositing £100
with their bankers to be paid to any party making a claim. Indirectly, this act
indicates their intention to be bound by the contract.
The Court held that the display of goods is deemed as only an invitation to
treat. An offer is said to be made when a customer puts the item into the
basket and the contract is made at the cash counter. Therefore, the
shopowner did not make any sale which is against the law.
(c) Auctions
In a public auction, the auctioneer invites the public to make an offer, that is
to offer the highest bid. When those who attend make an offer, it is up to the
auctioneer whether to accept it or not. An acceptance is considered made at
the fall of the hammer. Section 10 of the Auction Sales Enactment [Chap. 81
of the Federated Malay State] states that:
An example is the decision in Spencer v. Harding (1870) where the court held
the same statement as that in Section 10 of the Auction Sales Enactment .
In the case of Fitch v. Snedaker (1868), the Court held that the reward cannot be
claimed by the person if he is not aware of the reward for such an act before he did
the said act because there is no consensus of mind between the proposer and the
promisee. Communication of a proposal is thus crucial. Section 4(1) of the CA 1950
provides:
Example: Ah Chong proposed to sell his car to Bala for RM15,000 by a letter posted
on 1 January 2012. Bala only received the offer letter on 10 January 2012. In this
case, the communication of the proposal is only completed on 10 January 2012, that
is, when Bala received the letter.
This differs for an acceptance by post. Section 4(2) states that communication of an
acceptance is complete against both parties (the proposer and the promisee) at
different times. Do refer to Section 4(2) of the CA 1950.
If you refer to Section 4(2)(a) of the CA 1950, you will find that a proposer binds
himself to the contract as soon as the promisee puts the letter of acceptance into
the post box even if the proposer does not know of the acceptance. The proposer
therefore cannot revoke his proposal because the letter of acceptance is already in
the post box.
Example: A proposed to B by a letter dated 7 January 2014 to sell his farm for
RM55,000. A later wished to revoke his proposal and sent a revocation letter dated
10 January 2014. B received the offer letter on 12 January. On 13 January, B posted
an acceptance letter to A. B received the revocation letter on 15 January 2014. A
later refused to carry on with the contract and informed B he had revoked the offer.
The issue is whether a contract has already been formed between A and B. If a
contract has been formed, A has to carry on with the contract and if he refuses he
could be liable for breach of contract.
Thus, there is a contract and it binds A. A must continue with the contract. Section
6 of the CA 1950 provides four ways in which a revocation of an offer is made. We
will discuss each of them now.
Definition
It means, if a proposer wishes to withdraw his proposal, he must
communicate his revocation of the proposal to the promisee. If he fails
to do so before an acceptance is made, his revocation of the proposal is
then ineffective.
Provision
Section 4(3) provides that communication of a revocation is complete:
(a) As against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of the
power of the person who makes it; and
Section 4(3) refers to the two different parties involved. Paragraph (a) refers
to the proposer while paragraph (b) refers to the promisee. In order to
completely revoke a proposal, both paragraph (a) and (b) of Section 4(3) must
be satisfied. Refer to Illustration (c) of Section 4 of the CA 1950 for a clearer
picture of this section.
(i) Was the revocation of the proposal effective even though it was not
communicated?
(ii) Was the posting of the said letter of revocation of the proposal a
communication of revocation against the promisee (the plaintiff in this
case)?
The Court held that the revocation of the proposal was inoperative as against
the plaintiff until it came to his knowledge. The posting of the letter of
revocation by the defendant was not communication. The acceptance made
by the plaintiff on 11 October could not be affected by the fact that the
defendantÊs letter of revocation was already on its way. There was a valid
contract on 11 October. Revocation of the proposal was only effective on 20
October, that is, the day when the plaintiff received the revocation letter. The
defendant therefore was bound by the contract.
The case of Henthorn v. Fraser (1892) further shows the position of the
principle regarding revocation of a proposal. Lord Herschell held that
„communication of an acceptance takes place once such letter is posted is not
applicable to communication of revocation of a proposal. Communication of
revocation of a proposal is similar to communication of a proposal where it
is not effective unless brought to the mind of the promisee.‰
(b) By the lapse of the time prescribed in the proposal for its acceptance, or, if no
time is prescribed, by the lapse of a reasonable time, without communication
of the acceptance
Definition
This provision means that if a proposal has stated a time for an
acceptance and no acceptance has been made within the specified time,
the proposal will lapse or is revoked.
Example: Pak Ali proposed to sell his farm to Pak Abu for RM10,000. Pak Ali
told Pak Abu that the offer is open only for two weeks. If Pak Abu failed to
accept within two weeks, the proposal lapses.
What if there is no fixed time for acceptance of the proposal? When will such
a proposal lapse? In such cases, a proposal lapses after a reasonable time.
What is reasonable time depends on the discretion of the court based on the
facts of the case and the nature of the subject-matter of the said contract.
This can be seen from the case of Ramsgate Victoria Hotel Co v. Montefiore
(1866). The defendant applied for shares in the plaintiffÊs company by a letter
dated 8 June. He received no further news until 23 November by a letter from
the plaintiff which informed him that the shares had been alloted to him. The
defendant refused to accept them.
The court held that the defendantÊs proposal had lapsed because of the
plaintiffÊs failure to accept within a reasonable time. So, the defendant was
not bound to accept the shares.
Definition
If a promisee accepts a proposal by introducing new terms or refuses to
accept the terms specified by the proposer, the original proposal
therefore lapses. In this situation, an acceptance accompanied by new
terms is not an acceptance. It is otherwise deemed as a refusal of the
original offer, and is a counter-offer.
The Court held that B had refused AÊs proposal and had made a counter-
offer instead. There was no contract because the counter-offer caused the
original offer to lapse. A was entitled not to sell his farm to B.
SELF-CHECK 2.2
(d) By the death or mental disorder of the proposer, if the fact of his death or
mental disorder comes to the knowledge of the acceptor before acceptance
A proposal will lapse if the proposer dies or is mentally disordered and the
death or the mental disorder is known by the promisee before he makes an
acceptance.
A proposal will also lapse if a promisee has died and the executor or the
estate administrator cannot accept proposals on behalf of the deceasedÊs
estate or inheritance. This was decided in Re Chesire Banking Co. (1886).
EXERCISE 2.1
1. By a letter dated 1 July 2014, Ali proposed to sell Adam his farm
for RM15,000. In it, Ali stated that the proposal was open until
1 August 2014. On 10 July 2014, Adam received the proposal
letter. He wrote back to state his acceptance on 20 July. On 15 July,
Ali posted a letter revoking the proposal to Adam. The letter of
revocation of the proposal only reached Adam on 25 July 2014.
Adam demanded Ali to perform his promise but Ali claimed that
he was not bound by the proposal as he had revoked it before
1 August 2014. Advise both parties.
2.3 ACCEPTANCE
An acceptance is a final and unqualified expression of assent to the terms of an
offer. Now let us look at acceptance in detail.
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.
It is not an acceptance if the promisee only agrees to a part of the terms while
rejecting the rest. An acceptance will only constitute a contract if all the terms
in the proposal are accepted in absolute. A proposal which is not accepted in
absolute will become a counter-offer as decided in Hyde v. Wrench (1840).
The counter-offer will eliminate the original proposal and the promisee is not
able to reenact it.
Example: Ali proposed to sell his wristwatch to Abu for RM50. In his
proposal Ali stipulated that Abu must pay in cash if he is to accept the
proposal. If Abu had paid by way of a postal order, Ali can assert within a
reasonable time after the communication of acceptance was made, that
payment can only be made in cash. If Ali does not assert as such within a
reasonable time and still accepts the postal order, Ali is then deemed to have
accepted the manner in which Abu had made his acceptance.
The Court held that there was no acceptance by the nephew as he had kept silent.
Plaintiff therefore had no right to claim the horse as there was no contract.
Generally, silence does not amount to an acceptance even if the promisee intends
to accept the proposal. However, silence may amount to an acceptance if the
promisee gains some benefit out of the proposal when he has ample time to reject
it.
Example: A proposer sent food to the promisee, prescribing that payment for the
food needed to be paid if the promisee accepts the proposal by consuming the said
food. In this situation the act of consuming the food amounted to an acceptance
even if the promisee kept silent (not communicating his acceptance to the
proposer). This principle was held in Weatherby v. Banham (1832).
Definition
If a proposal prescribes a time limit for an acceptance to be made, such a
proposal must be accepted within the prescribed time. Any failure will
nullify the proposal. If no time is prescribed, acceptance then must be
made within a reasonable time. Do refer to Section 6(b) of the CA 1950.
Reasonable time was discussed under the topic of „offer‰ earlier. In Ramsgate
Victoria Hotel Co. v. Montefiore (1866), the defendant applied for shares in the
plaintiffÊs company on 8 June. He received no further news until 23 November.
When he was informed that the shares have been alloted to him the defendant
refused to accept them.
The Court held that the plaintiff had allowed too long a time to lapse before
accepting defendantÊs offer. Therefore, the defendant was not liable to accept the
shares.
It is clearly shown that the delay in making an acceptance in cases which involve
shares will deny the existence of a contract, being subject to price fluctuations.
ACTIVITY 2.2
The Court held that there was a contract made in London, and the English Court
therefore had the jurisdiction to hear the case. Communication of acceptance was
deemed to be instantaneous, and was formed the moment the plaintiff received
the defendantÊs telex of acceptance in London.
It must be noted that the above description is only applicable for instantaneous
means of communication. What is the principle for non-instantaneous means of
communication (where there is a gap of time between acceptance made by the
acceptor and communicated to the proposer)? Refer to Section 4(2) which is the
exception to the general rule and illustration (b) of Section 4 for a clearer picture.
The contract binds both parties, that is the proposer and the promisee at two
different times. Illustration (b) states that the contract binds against A the moment
the promisee posted the letter of acceptance. Whether the letter arrives to the
proposer or not is not a relevant issue.
Ignatius v. Bell (1913) explains this situation. The defendant, Bell, gave an option
to the plaintiff to purchase a piece of land on the condition that the option must be
exercised on or before 20 August 1912. Both parties had contemplated the use of
the post as means of communication. The plaintiff sent a registered letter on 16
August 1912. Because he was not at home, the defendant only received it on the
evening of 25 August.
The Court held that the contract bound the defendant on 16 August 1912, that is,
when the plaintiff posted the letter of acceptance. The said option was executed
within the specified time.
The contract binds the promisee the moment the posted letter of acceptance is
received by the proposer. It is clearly provided for in the second part of Illustration
(b) of Section 4 of the CA 1950.
What is the position of the proposer and promisee if the said letter does not arrive
or is lost in transmission? The law is of the position that the proposer is bound by
the contract while the promisee is free from the contract until the said letter is
found and sent to the proposer. The court in Byrne v. Van Tienhoven (1880)
held that if a proposal and acceptance are made by means of transmission by post,
a contract is formed the moment the letter of acceptance was posted, even if it
does not arrive at its destination. As a precaution, a proposer can include a term
in the proposal whereby an acceptance is deemed complete at the time the
proposer receives the acceptance letter.
It must be noted that Section 4(2) and Section 4(3) of the CA 1950 may appear to
be similar. It differs however as to when different parties to the contract are bound
since it is subject to when the letter is posted and when the letter reaches the
destination.
Example: Abu accepts BakarÊs offer by a letter dated 8 January. Abu revoked his
acceptance by telegram on 10 January. Communication of revocation is complete
against Abu on 10 January while against Bakar it is complete when the telegram
reaches him.
In his attempts to revoke his acceptance, a promisee must therefore ensure that
Section 4(3)(a) and (b) of the CA 1950 must be complied with before a contract
can bind him (Section 4(2)(b) is complied with, that is, the letter of acceptance
reaches the proposer).
EXERCISE 2.2
2. Nani told Nina that she would like to sell her new Proton Saga car
to Nina for RM25,000. Nina immediately takes RM20,000 and gives
the money to Nani.
2.4 CONSIDERATION
Consideration is an important element for the formation of a valid and binding
contract. It is defined in Section 2(d) of the CA 1950.
„When, at the desire of the promisor, the promisee or any other person has
done or abstained from doing, or does or abstains from doing, or promises
to do or to abstain from doing, something, such act or abstinence or promise
is called a consideration for the promise‰.
The definition clearly shows that consideration must exist in each and every
contract and is of value according to the offerorÊs wishes. It may consist of a
conduct, or a price to be paid in return for the promise made by, or the conduct of,
the promisor. The conduct need not necessarily to be of a positive nature. In fact it
can also be in the form of an abstinence from doing something.
The court in Curie v. Misa (1875) held that a valuable consideration in the sense of
the law may consist either in some right, interest, profit or benefit accruing to one
party, or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other.
Example: Jay sold his pen to Bob for RM10. The consideration in this case comes
in the form of the RM10 Bob paid to Jay. The consideration is in monetary value.
Example: Jay promises to present a gift to Bob if Bob wins a racing competition. In
this example, the consideration is BobÊs conduct, which is winning the race.
Definition
It is also known as a promise in return for a counter-promise or
consideration in the future from the other party. The consideration is
not fulfilled yet but will be fulfilled as soon as the other party fulfills
his promise.
Definition
Such a consideration exists when one party had done his or her part
according to the contract. The other party therefore is under a duty to
fulfil his promise. An executory promise is also known as an executory
consideration, that is a promise made in exchange for the other partyÊs
conduct.
Example: Uma found AminÊs identity card and returned it to him. Amin then
promised to reward her RM50. AminÊs promise is an act of responding to
UmaÊs previous act and is termed as past consideration.
Example: Chin promised to pay RM1,000 to Bala if Lai sends the promised
goods at the promised time. If Lai sends the goods at the fixed time but Chin
later refuses to pay Bala, Bala then has the right to sue Chin even if he has
not furnished any consideration to ChinÊs promise. The consideration in this
case comes from a third party which is Lai. This principle is according to the
CA 1950 and it differs from English law.
Distinguish this case with the position under English law. It differs as English
law does not recognise the existence of a contract if consideration comes from
a third party and not the promisee, as decided in Tweddle v. Atkinson (1861).
Kenneth and Alice were husband and wife. KennethÊs father and father-in-
law (Peter and David respectively) both agreed to pay certain sums of money
to Kenneth and Kenneth has the right to take legal action if they failed to do
so. The agreement was confirmed in writing after KennethÊs and AliceÊs
marriage. After Peter and DavidÊs death, Kenneth sued DavidÊs executors for
the promised money.
The court held that the action failed because Kenneth is a stranger to the
contract. He did not give any consideration to the contract between Peter and
David.
Refer to Kepong Prospecting Ltd & Ors v. Schmidt (1968). Based on Section
2(d), the court held that consideration to a contract need not come from a
promisee. Let us recall the example involving Chin, Bala and Lai. According
to English law, Bala has no right to sue Chin because Bala did not furnish any
consideration for ChinÊs promise. The consideration came from Lai, who
delivered the goods on time.
Let us look at Kepong Prospecting Ltd & Ors v. Schmidt (1968), being a case
decided based on Section 2(d). Schmidt, a mining engineer, actively assisted
a person to obtain a prospecting permit in Johor. He subsequently helped to
incorporate Kepong Prospecting Ltd and was appointed as managing
director. Upon incorporation, an agreement was made between them
whereby the company agreed to pay Schmidt 1 per cent of the selling price
of all iron produced and sold. This was in consideration for his services to
the company prior to its formation, after its incorporation and for future
services.
The court held that the consideration by Schmidt after the incorporation of
the company but before the agreement was made was a valuable
consideration and could be claimed under the law. However, Schmidt could
not claim on the consideration made before incorporation. Refer to
Illustration (c) Section 26 of the CA 1950.
As a general rule, English law does not recognise past consideration. This is
clearly shown in Roscorla v. Thomas (1842). The plaintiff bought a horse
from the defendant. The sale was executed. After the sale, the defendant
guaranteed that the horse was sound and free from vice. The horse was in
fact vicious.
The court held that the guarantee was a promise made on past consideration.
Past consideration will not make a promise binding.
Even though the above explains the general rule, there are cases with
exceptions to the general rule. Past consideration is still accepted in English
law as good consideration if the act or omission was done at the request of
the promisor as in Lampleigh v. Braithwait (1615).
The defendant in this case sought the plaintiffÊs help to seek a royal pardon
from the King. The plaintiff used his own money for the effort and the
defendant later promised to pay him £100. The defendant failed to pay and
the plaintiff sued for the amount.
The court held that it was past consideration, which was clearly seen from
the facts of the case. The court however agreed to the plaintiffÊs claim because
the said consideration was done at the desire of the promisor (defendant).
In this situation, the promisee released the promisor from performing the
agreed promise.
Can a promisee accept part payment as payment for the whole debt?
According to Section 64, a promisee may do so. Look at the phrase
„⁄promisee may dispense with or remit, wholly or in part, the performance
of the promise⁄‰
for that amount. Also enclosed was a condition that should Kerpa Singh
refused to accept the offer, he had to return the cheque. Kerpa SinghÊs lawyer
cashed the cheque and kept the money.
The Federal Court held that by cashing the cheque, it showed that Kerpa
Singh had agreed to the RM4,000 as a discharge of the whole debt and
therefore cannot claim the balance of RM4,869.94 from Barian SinghÊs son.
English law differs on this point, where part payment is not considered as the
settlement of the whole debt. It is thus different from the Contracts Act, as shown
in PinnelÊs (1602).
In this case, Pinnel sued Cole for payment of debt amounting to £8 10s. Cole
claimed that he had made a part payment of £5 2s and Pinnel has accepted it as
payment of the whole sum.
The Court held that payment of a lesser sum in satisfaction of a greater sum could
not be any satisfaction for the whole.
The principle laid down in PinnelÊs was accepted by the House of Lords in Foakes
v. Beer (1884). Dr Foakes owed Mrs. Beer a sum of £2,090. Mrs. Beer agreed that
she would not take any proceeding whatsoever against him if he paid £500 in cash
and the balance of £1,590 in instalments. Dr. Foakes agreed and did so. Mrs. Beer
however sued him an additional payment of £360 for interest on the debt. When
he was sued, Foakes claimed that his obligation to pay the interest was discharged
on Mrs. BeerÊs promise that she would not take any legal proceeding.
The House of Lords held that Dr. Foakes was under an obligation to pay the
interest amounting to £360.
Hence, under English law in general, part payment is not a satisfaction of the
whole debt. There are however exceptions in certain cases where the court would
apply the principle of promissory estoppel.
Definition
Promissory estoppel applies when a creditor based on his representation
or conduct is stopped from denying part payment as a settlement of the
whole debt.
It was held that the plaintiff was entitled to the claim. However, the court went
further to state the principle that had the plaintiffs sued for the full rent between
1940 and 1945, they would be unsuccessful because they themselves had agreed to
reduce the rent. The doctrine of promissory estoppel would be applicable and the
plaintiff by their promise would be estopped from suing.
The Court held that a person who received a subpoena to attend court is
under the duty and bound to do so. There was no consideration for the
promise as he did not do anything over and above his existing public duty.
However, if a promisee had done something over and above his legal duties,
it would be a valid consideration. In Glassbrook Brothers Ltd v. Glamorgan
County Council (1925), the police sued for a sum of £2,200 promised to them
by a mining company. The promise was for the provision of a stationary
guard during a strike. The Court held that the police was entitled to the sum
for the undertaking to provide more protection that what the police thought
necessary, which is something over and above their duties under the law.
The Court held that such a promise did not bind the ship captain as the crew
were already bound in contract to ensure the ship would arrive safely to its
specified destination. It was further held that such a promise would bind if
there was a new contract with better pay signed between the captain and the
remaining crew.
ACTIVITY 2.3
The main issue is whether the agreement made by the promisor was freely given
or not. If the promisor stated that his agreement was not freely given, then the fact
that consideration was insufficient will be taken into account as proof that consent
was not freely given. Therefore the contract will be set aside. Refer to Illustration
(g) of Section 26 of the AC 1950.
Reference can be made to the case of Phang Swee Kin v. Beh I Hock (1964),
an appeal to the Federal Court.
The respondent agreed to transfer part of his land to the appellantÊs husband for
20,000 in Japanese currency. The agreement was made orally and no document of
transfer was signed. The appellantÊs husband died and she continued to live on
the said land. In 1963, the land was sub-divided into two and the appellant paid
RM500 to the respondent for transfer of said land which they both agreed orally.
However, the land was still under the respondentÊs name. The respondent
instructed the appellant to vacate the land and asked for the account of all income
received from the land. The appellant counter-claimed that she was entitled to the
said land. The High Court held that the oral agreement to transfer the land
between the respondent and the appellantÊs husband was void due to inadequacy
of consideration.
On appeal, the Federal Court however decided otherwise. It was held that
consideration was adequate because there was no proof which showed the
respondentÊs consent was not given freely. The appellant was entitled to the said
land as the respondent had agreed to transfer the land on payment of RM500.
You should understand from the decided cases that for consideration to be
adequate, consent must be given freely. Consideration needs to be of value in the
legal sense.
What is the position under English law? Must consideration be adequate? This can
be seen from the decision in Chappel & Co Ltd v. Nestle Co Ltd (1960). The
appellant owned the copyright in a dance tune called RockinÊ Shoes, while the
respondent was a chocolate manufacturer. As a publicity stunt, the respondent
sold the records to the public at the ordinary retail selling price of 1s/6p each plus
three Nestle chocolate wrappers.
Under Section 8 of the Copyrights Act 1956, any person has an automatic right to
use the copyright of any musical works with the condition that a certain percentage
from the selling price need to be paid to the owner of the copyright. The question
that arose in the Court was whether there was a sale according to Section 8, which
would give the right to the respondent to offer the record to the public, and
whether the three chocolate wrappers were valuable consideration.
The appellant contended that the respondent could not rely on Section 8 as there
was no sale because the consideration for the record included the three wrappers.
The House of Lords in a majority decision held that the chocolate wrappers have
an economic value and was certainly part of the consideration and therefore
sufficient to create a sales contract.
What will happen if a contract made does not have the element of consideration,
that is, the promisee need not do anything which would give any benefit to the
promisor? Refer to Illustration (a) of Section 26 of the CA 1950.
In Macon Works & Trading Sdn. Bhd v. Phang Hon Chin & Anor (1976), the Court
held that the option to purchase a piece of land was not valid due to lack of
consideration.
However, the CA 1950 provides exceptions to this general rule. Refer to Section 26
(a), (b) and (c) to ascertain those exceptions. Those exceptions will be discussed in
detail.
An agreement which lacks consideration but falls under one of the exceptions
in Section 26(a), (b) or (c) is deemed a valid and binding contract.
(i) Is in writing;
(ii) Is registered under the law for the time being in force for the registration
of such documents (if any); and
All the three elements or conditions must be fulfilled to use Section 26(a) to
make the contract valid even without consideration. To have a clear picture
about this section, refer to illustration (b) of Section 26 of the CA 1980.
Section 26(a) can only be applied to validate a contract which lacks consideration
if all the three elements are complied with. Refer to Illustration (b) Section 26 CA
1950 for a clearer picture of this section.
What are the circumstances deemed as natural love and affection between parties
standing in a near relation?
In the case of Re Tan Soh Sim (1951), an agreement to distribute the deceasedÊs
(adopted mother) property to her adopted son was void due to lack of
consideration. The court referred to Chinese customs and traditions as well as
circumstances in the said Chinese family and held that an adopted son only has a
near relation to his adopted father and not to his adopted mother and is thus not
within the scope of Section 26. Even if the element of natural love and affection
existed, it must only be between parties standing in „near relation‰ to each other.
The agreement therefore is void for failure to comply with element (iii), „natural
love and affection between parties standing in a near relation to each other.‰
(ii) One who has already voluntarily done something for the promisor; or
Only one part need to be complied with by the promisee for it to fall under
paragraph (ii). Refer to Illustration (c) of Section 26 for a clearer picture.
The important thing to note is that the act was done by the promisee voluntarily
and not at the desire of the promisor.
The issue of whether the plaintiff had voluntarily done something for the
defendantÊs firm arose in J. M. Wotherspoon & Co Ltd v. Henry Agency House
(1962).
The court held that something which was done on another personÊs suggestion
cannot be considered as having been done voluntarily. The plaintiff in this case
had acted on the defendantÊs suggestion and therefore the act was not voluntarily
done.
Illustration (d) in the CA 1950 Act clearly shows that B is under a legal duty to take
care of his infant son and he can be compelled under the law to execute the duty.
BÊs promise to pay AÊs expenses is a binding contract.
Example: A paid BÊs fine. B later promised to compensate A for paying the fine for
him. BÊs promise is binding and B must compensate A because paying the fine is
something which B was legally compelled to do.
The conditions that need to be complied with under the exception in Section
26(c) are:
(iv) The creditor might have enforced payment of the debt for the law of
the limitation of suits.
This section provides for a new agreement to be made for payment of debt. It needs
to be signed separate from the original contract which is barred by the time-limit
for bringing suits.
The Limitation Act 1953 is applicable in Malaysia. This Act provides a period of
six years from the date on which the cause of action accrued. If a creditor fails to
take any legal action within the period of six years from the date and the debtor
fails to pay his debts, the creditor may lose his right of action by lapse of time.
The Limitation Act 1953 provides that a time limit for an action in contract, that is
six years from the time the cause of action arises. If the creditor fails to bring a
court action within six years from the date the debtor failed to pay his debt, the
creditor no longer can bring an action as he or she is barred by the time limit. Thus,
Section 26(c) CA 1950 is an exception to the time limitation. Action can still be
brought if the conditions in (i) to (iii) are complied with. The written and signed
agreement by the debtor or his agent to pay a debt wholly or in part will activate
the debt which was barred by the time limit.
EXERCISE 2.3
1. Ahmad promised his wife that he will present their son, Man,
a house which he bought last year when Man gets married. Ahmad
changed his mind and refused to do so when Man got married.
Can Man sue his father for the house? Advise Man.
A. Executory consideration
B. Executive consideration
C. Executed consideration
D. Past consideration
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.
Section 11 of the CA 1950 states three groups of persons capable of entering into a
contract as follows:
(c) Not disqualified from contracting by any laws to which he is subjected to.
This is a general rule and can be seen from the decision in the case of Tan Hee Juan
v. Teh Boon Keat (1934) where a minor executed a transfer of land. The plaintiff
applied for a court order to revoke the said transfer. Hereford J. when deciding
said:
„The Privy Council have held that the effect of sections 10 and 11 of the CA of India
is that an infant cannot make a contract within the meaning of the Act, and that a
contract made by an infant is not only voidable but void (Mohori Bibee v.
Dharmodas Ghose, 30 Calcutta 539). That decision of the Privy Council is binding
on this court, and therefore there can be no doubt whatever that those transfers are
void⁄⁄and therefore the property is restored to the minor.‰
From the case above, it is clear that there are similarities between the Indian law
of contracts and the CA 1950, and Indian cases which discussed similar provisions
are applicable in the interpretation of the CA 1950.
Therefore, it is clear that only a major (of 18 years of age) can enter into a contract.
However, there are exceptions to this rule where even a child who has not attained
the age of majority may be allowed to enter into a contract, and it is valid. What
are those exceptions?
There are five exceptions to the general rule. Refer to Figure 2.3.
Provision
Section 69 of CA 1950 – if a person, incapable of entering into a contract,
or anyone whom he is legally bound to support, 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 contract for necessaries is valid if it is agreed by the minor and it is for
the purpose of supplying the said minor with necessaries and not mere
luxuries which he does not require. If a person entered into a contract with
a minor to supply him with necessaries, the person who supplied him
can claim for reimbursement from the minorÊs property.
Provision
Section 69 CA 1950 provides on what are necessaries for a person who is
incapable of entering into a contract.
Example: Aiman supplied Bakar who is an orphan and a minor, with food
and clothes suited to the condition of his life. Therefore, Aiman is entitled
to be reimbursed from BakarÊs property.
The court in Malaysia decided that education is a necessity in life for a minor.
It was held in Kerajaan Malaysia v. Gurcharan Singh & Ors (1971). It must
be noted that this case was decided before an amendment to the CA 1950 was
made, which now provides for capacity of a minor to enter into scholarship
agreements.
Definition
„Scholarship agreement‰ means any contract or agreement between
an appropriate authority and any person (hereinafter in this Act
referred to as a „scholar‰) with respect to, any scholarship, award,
bursary, loan, sponsorship, or appointment to a course of study, the
provision of leave with or without pay, or any other facility, whether
granted directly by the appropriate authority, or by any other person
or body, or by any government outside Malaysia, for the purpose
of education or learning of any description‰.
In this case, the plaintiff sued the first defendant as the promisor and the
second and third defendants as the guarantors for breach of contract. The
claim, amounted to RM11,500, the amount which was said to be the expenses
spent for the first defendantÊs education. The first defendant was a minor at
the time the contract was made. The Court held that the contract was void.
But as the training is to enable him to qualify for and accept the appointment
as a teacher, it is a provision of necessaries, and the first defendant was liable
to reimburse the amount spent for his education.
Logically, we can say that education, food and clothing can be categorised as
„neccessaries‰ with the condition that it is suited to the condition in life of a
minor, and not something which he already has and is adequately supplied
with.
Provision
Notwithstanding anything to the contrary contained in the principal
Act 1950, no scholarship agreement shall be invalidated on the ground
that the scholar entering into such agreement is not of the age of majority.
ACTIVITY 2.4
It cannot be denied that there are cases where students attempt to avoid
paying their loan balances to the government and the government
has resorted to advertising their names in newspapers. How far do you
agree with the provision you have just learnt?
In the decided cases, the courts would not rule that such benefits be restored
if the plaintiff is a person who has the capacity to contract and is not a minor.
This is to prevent adults from binding a contract upon a minor.
In Tan Hee Juan v. Teh Boon Keat (1934) a minor executed two transfers of
land and received the purchase money for the said land. The Court held that
the transfer was void and the minor allowed to get the return of his land, and
the court denied the buyers claim for refund of the purchase money. Refer to
Section 66.
Section 40 of the Specific Relief Act 1950 on the other hand provides:
Section 40 of the Specific Relief Act clearly shows that the court has the
discretion whether to require that the benefits be restored or to make
compensation. This was so decided in Tan Hee Juan (1934) when Hereford J.
refused to use its discretion to order a refund of the purchase price paid by
the defendant for the land.
In another case, Leha binti Jusoh v. Awang Johari bin Hashim (1978), the
Federal Court applied Section 66 of the CA 1950 by ordering the benefits be
returned. The respondent (a minor) bought a piece of land from the
appellant. He paid the purchase price and occupied the land. The Federal
Court held that the contract was void and ordered the respondent to vacate
the land and the appellant to refund the purchase price.
From the above evidence, it is clear that a person has to be careful and refrain
from entering into a contract with a minor because in all probabilities the
Court will not order that any benefits be returned and the other party to the
contract is bound to incur losses.
EXERCISE 2.4
A person is said to be of sound mind for the purpose of making a contract if,
at the time when he makes it, he is capable of understanding it and of forming
a rational judgement as to its effect upon his interests.
A person who is usually of unsound mind, but occasionally of sound mind, may
make a contract when he is of sound mind. Refer to Illustration (a) Section 12.
In Imperial Loan Co. v. Stone (1892), Lord Esher put forth a principle as such:
„When a person enters into a contract, and afterwards alleges that he was so
insane at the time that he did not know what he was doing, and proves the
allegation, the contract is as binding upon him in every respect, whether it is
executory or executed, as if he had been sane when he made it, unless he can
prove further that the person with whom he contracted knew him to be so
insane as not to be capable of understanding what it was about.‰
The decision of Imperial Loan Co. v. Stone shows that if a person of unsound
mind wishes to make a contract void, he needs to prove both conditions in
Section 12(1) first. Failure to prove both conditions in the section will make
the contract binding as if he was of sound mind at the time it was made.
Meanwhile, a failure to prove that the said person is of unsound mind will
mean that the contract is valid. The contract therefore cannot be made void.
This principle was applied in Che Som bt Yip & Ors v. Maha Pte Ltd. & Ors
(1989). The Court held that the contract made by a person of unsound mind
was voidable at oneÊs option by proving that she was of unsound mind at the
time the contract was signed and the other party knew of her unsoundness
of mind at the time she entered into a contract.
The first and second plaintiff in this case were administrators for the estate
of the third plaintiff who was of unsound mind. The third plaintiff had took
out a mortgage on his property with the defendant. The first and second
plaintiff applied for a declaration that it was a void contract and successfully
proved that the third plaintiff was of unsound mind at the time they entered
into a contract. Did they prove the second limb, that the defendant knew that
he had entered into a contract with a person of unsound mind?
The Court also held that the defendant knew of that matter. The declaration
applied for was granted and the contract was made void.
The provision states that a person of unsound mind can still make a contract of
necessaries.
EXERCISE 2.5
It simply means that if there are laws which stipulate that a person is incapable of
entering into contracts, such person is deemed to have lost the capacity to enter
into a contract.
„Loss of capacity‰ means that the said party may have the capacity to contract but
lost it due to some circumstances under any laws or he is capable according to the
CA 1950 but lost it according to other laws to which he is subjected to.
NOTE: There should be a specific provision in the relevant law which states
that a person has lost his capacity to contract.
Intention is an element of which the court must firstly exist before deciding on the
existence of a binding contract
The CA 1950 is silent on intention. How then would the court determine its
existence? It has been the practice of the Malaysian courts to refer to English cases
in determining the existence of intention.
Under English law, there is no binding contract unless the involved parties in the
agreement have the intention to enter into such relationship under the law. This
was decided in Weeks v. Tybald (1605).
The test used is an objective test, that is, the opinion of a reasonable man. Even if
the promisor did not intend to create legal relations, the court would still
presumed an intention exists if a reasonable man is of the opinion that intention
existed to bind the promisor. The promisorÊs real intention is immaterial. This rule
was decided in Carlill v. Carbolic Smoke Balls Co. (1893).
The court would usually look at the types of contracts made in determining
whether there was intention or not. This presumption could be set aside if it could
be proven otherwise by the contracting parties.
Distinguish the above case with Ferris v. Weaven (1952). The presumption of
no intention in domestic agreements was set aside by the courts. The Court
held that a husbandÊs promise to the wife that she could take their house
when they divorced was enforceable by the wife because there was intention
binding in law. This was due to the fact that when the promise was made
they had agreed to a separation.
In Choo Tiong Hin & Ors v. Choo Hock Swee (1951), the Singaporean Court
of Appeal applied the English Law in Balfour v. Balfour. According to the
court, the law did not presume agreement between family members
(adopted son and adopted father) as binding in law. Family agreements
cannot be enforced as a contract.
The respondent, in this case, sued his son and adopted grandson for family
land and home. The defendant alleged that there was a contract between the
respondent and the appellant that they were equally entitled to possession
of the farm and home if they work on the farm and helped acquire wealth.
The Court of Appeal however, held that the respondent was not entitled to
the property and home because the agreement between them was not
intended as to be binding in law.
The clause indicates that the contractual party does not intend the said
agreement to bind until a full and complete contract is signed.
In Winn v. Bull (1877) there was a written agreement for the lease of a house
„subject to and is dependent upon a formal contract being prepared‰.
No formal contract was entered into by the parties and the court held that
there was no enforceable contract.
The Malaysian court in Low Kar Yit & Ors v. Mohd Isa & Anor (1963) agreed
with Winn v. Bull (1877). The defendant gave an option to the plaintiffÊs
agent to buy a piece of land subject to a formal contract to be drawn up and
agreed upon by the parties. The plaintiffÊs agent duly exercised the option
but the defendant refused to sign the agreement of sale. The court held that
there was no contract because there was no formal contract agreed by both
parties.
However, it must be noted that in most cases the clause „subject to contract‰
gives the effect of denying the existence of intention. This fact was clear from
the decision in Daiman Development Sdn Bhd v. Mathew Lui Chin Teck &
Anor (1981). The Privy Council held that:
„It has been recognised throughout the cases on the topic that such words
prima facie create an overriding condition, so that what has been agreed
upon must be regarded as the intended basis for the future contract and
not as constituting a contract‰.
The above decision lays down that the clause „subject to contract‰ in a contract
only shows the desire to create a binding contract in the future and not to make
the agreement into a binding contract.
SELF-CHECK 2.3
EXERCISE 2.6
Abdul Aziz promised to give RM600 per month to his wife Anis for a
period of two years. Anis brought the matter to the court when Abdul
Aziz failed to fulfil his promise. The court decided that Anis was not
entitled to the amount promised.
Which of the following case provides the principle that was referred to
by the court in deciding the case between Anis and Abdul Aziz?
A. Winn v. Bull
B. Ferris v. Weaven
C. Balfour v. Balfour
D. Low Kar Yit v. Mohd Isa
2.7 CERTAINTY
Even if other elements which are required in a contract are complied with, an
agreement can sometimes be defective due to the inability of the court to determine
what are the real terms agreed by the parties. Every term or condition in the
contract must therefore be clear and its meaning ascertainable.
Refer to Illustrations (a), (c), (d) and (f) of Section 30 of the CA 1950.
See also the court decision in Karuppan Chetty v. Suah Thian (1916). There was no
certainty when the contracting parties agreed to lease out of the land for RM35 a
month for „as long as you like.‰ It was held that the contract was void.
Therefore, parties to a contract have to use words which are clear and specific in
meaning for there to be a binding contract.
SELF-CHECK 2.4
• An offer exists when an offeror or promiser, by his act or words, states his
willingness to be bound by the contract as soon as the other person to whom
he made the proposal accepts it.
• Acceptance must be absolute and unqualified. If the offeror modified the term
of acceptance or does not follow the conditions stated by the offeror, it will
amount to a counter offer.
• Consideration must exist in each and every contract and is of value according
to the offerorÊs wishes. It may consist of a conduct, or a price to be paid in
return for the promise made by, or the conduct of, the promisor. The conduct
need not necessarily to be of a positive nature. In fact it can also be in the form
of an abstinence from doing something.
• The parties entering into a contract should be competent. The persons are said
to be not competent to enter into a valid contract if he is a minor or of an
unsound mind or bankrupt.
• The parties entering into contract must have legal capacity to do so.
Acceptance Intention
Agreement Offer
Certainty Revocation
Contract
INTRODUCTION
In this topic, you will be introduced to void contracts. The topic will cover matters
that would cause a valid contract to be void. You will also notice the differences
between void and voidable contracts. It is important that the involved parties be
cautious when entering into such contracts as these contracts could lead to a loss
due to it being void. When a contract is void, the involved parties cannot get the
assistance of the court for recovery of benefits which is passed to the other party.
We also will explore voidable contracts in this topic. Voidable contracts are
contracts made without free consent by one of the contracting parties. It is
important to understand each factor that affects the validity of a contract. Factors
that cause a personÊs consent not to be freely given will be discussed further in this
topic.
We will move on to study the different forms of void contracts in the Contracts
Act 1950.
When a contract becomes void, it therefore means that it is a contract without any
legal effect. The parties to the contract are, thus, under no obligation to perform
the contract. Such contracts are a complete nullity in law right from the very
beginning and therefore no right or duty flows from the contract. The courts also
will not enforce such contracts.
Therefore, any person who wishes to enter into a contract must first ensure that
the contract he is going to make is not one which could be considered void. This is
because the contracting parties will not get any benefits under a void contract. The
court will also not allow claims for compensation in such cases.
Definition
This means that agreements agreed by the contracting parties clearly
contravene with the provision of any laws. Such contravention will
therefore result in the contract being void because it is forbidden by law.
In Wai Hin Tin Co. Ltd. V. Lee Chow Beng (1968), the defendant took out a
loan from company funds in contravention of its Articles of Association and
the Companies Ordinance 1940. The contract was therefore void and the
plaintiffÊs claim for the repayment of the loan was rejected.
Murugesan v. Krishnasamy & Anor (1958) differs on the facts of the case. The
defendants occupied land held under Temporary Occupation Licence, and
applied for permanent title to the land. Then, they entered into a written
agreement with the plaintiff and agreed to execute a valid transfer of the land
to the plaintiff as soon as the Collector of Land Revenue issued the title.
While waiting for the application to be approved, the defendants allowed the
plaintiff to enter the land. The defendantÊs application was rejected and the
plaintiff sued for damages. The defendant refused on the basis of a void
contract due to illegality.
The Court held that the contract was valid but became impossible to perform.
The plaintiff therefore was entitled to damages and recovery of monies paid.
In Rasiah Munusamy v. Lim Tan and Sons Sdn. Bhd (1985), the respondent
orally agreed to sell his house to the appellant. Section 12(1) of the Housing
Developers (Control and Licensing) Rules 1960 states that every contract of
sale must be in writing. However, Rule 17 only imposes a fine if Section 21 is
contravened. The contravention does not make the oral contract void. The
court held that it was a valid and enforceable contract.
Definition
It refers to a contract which was signed but not expressly contrary to
any provisions of the law. The law on the other hand only forbids
such agreements or contract by implication, that is by imposing fines
or penalty for any contravention.
Based on these issues, the court held that the consideration and object of the
contract was valid. However, if the consideration (payment to RB even
though he was unregistered) was allowed, it would defeat the provision of
the law. That law does not forbid such contracts to be made. On the other
hand, it only restraints those who are unregistered.
If the court allowed RB to get his payment, the court may create a precedent
where other non-Singaporean engineers may abuse the law in Singapore. In
this case, it was not relevant whether the defendant knew that the plaintiff
was unregistered because if it would still defeat the provision of the law to
allow it. Therefore, RB failed to get the payment.
It is hoped that you can understand the differences in Sections 24(a) and
Section 24(b). Section 24(a) clearly deals with situations where the
consideration or purpose of the agreement contravenes the law, while
Section 24(b) covers situations where the consideration or purpose of the
agreement do not contravene any law but if permitted, it would defeat the
law. Refer to Illustration (i) of Section 24.
Definition
Paragraph (d) applies to the person or property of another person.
Applying this principle, if two parties agreed to destroy a third partyÊs
house for a sum of money which will be paid by another person, this
agreement is void in accordance with paragraph (d).
In Syed Ahamed bin Mohamed Alhabshee v. Puteh binti Sabtu (1922), the
defendant agreed to sell a property to the plaintiff in which an infant had an
interest. This transaction was detrimental to the child and therefore held void
by the court.
Most of the cases referred in this paragraph are those involving sexual
relationships. The English cases did not give a clear picture as to what
facts constitute immoral acts. However, Pollock in „The Principles of
Contracts„ suggested that „immoral acts„ be given a wide meaning and
not only be restricted to sexual acts. This may be so in the context of the
Contracts Act if we refer to the instance in Illustration (j) of Section 24.
The court in Theresa Chong v. Kin Khoon & Co (1976) took this stand.
However, in Sinyium Anak Mutut v. Datuk Ong Kee Hui (1982) the
court did not agree with TheresaÊs case restricting the range of
categories which can fall under public policy.
SELF-CHECK 3.1
EXERCISE 3.1
Definition
Section 28 explains that every agreement which contains restrictive clauses is
void immaterial of the extent of the said restriction, even if it is reasonable.
However, the restriction will not rescind the whole contract. It means
therefore that only the part of contract which does not restrict will be valid
and enforceable.
According to English law, an agreement which contains restraint of trade will only
be declared as void if the restraint is unreasonable. This means that if there is a
restraint imposed on one of the parties of the contract, but it is reasonable, then the
contract is still valid. This was so decided in Nordenfelt v. Maxim Nordenfelt Guns
and Ammunition Co. Ltd. (1894). The decision differs from Section 28 of the
Contracts Act which provides that such restriction is still void even if it is
reasonable.
This stand was taken by the court in Wrigglesworth v. Wilson Anthony (1964). An
agreement was made between the plaintiff, an advocate and solicitor, and the
defendant, restraining the defendant from practising his profession as an advocate
and solicitor within five miles from Kota Bharu for a period of two years after the
termination from the present firm. The defendant stopped working in the
plaintiffÊs firm and started his own firm in Kota Bharu. The plaintiff prayed for an
injunction to restrain the defendant from doing so. It was held that the restraint of
trade covenant was void in absolute in accordance with Section 28.
Due to the clear wording of Section 28, the cases clearly show that it is immaterial
whether the restraint is reasonable or otherwise. As a general rule, an agreement
in restraint of trade is void to the extent of the period and distance of restraint
stipulated in the contract. However, it is subjected to several exceptions provided
under the Act. Refer to Explanation 1, 2 and 3 in Section 28 of the CA 1950.
If the facts of a case indicate that any of the exceptions can be applied, the contract
then is valid and enforceable although it is in restraint of trade.
EXERCISE 3.2
The time limit a person could enforce his rights under a contract is provided by
the Limitation Act 1953, that is six years from the date of the breach of the contract.
If there is a condition made to limit the time within the six year period, the contract
is then void in accordance with Section 29.
Thus, a party to a contract who suffered losses due to breach of the contract has six
years to bring legal action from the date of the breach.
The court held that the claim was less than the time provided for under the
Limitation Act. The clause therefore was in contradiction with Section 29 and thus
void.
However, there are three exceptions to the general rule, where a contract is still
valid despite the restraint. The exceptions are provided under Section 29. Refer to
Exceptions 1, 2, and 3 in Section 29 of the CA 1950.
Exceptions 1 and 2 provide that it is valid for the parties to agree to insert a
condition in the contract to refer to arbitration for any disputes which may arise in
respect of the contract. This was decided in Scott v. Avery (1836).
In Joshi v. United Indian Association (1936), it was held that there could be no
contract which would deny absolutely the right of a party to refer any decision by
arbitration to a court. If a contract states that any decision by arbitration is absolute
and cannot be appealed in any court, the contract is void as to the extent of the
restriction.
Therefore, this means that the contracting parties can agree to submit for
arbitration first before making any appeals on the arbitration award.
In summary, Section 29 means that any clause which limits the time a person can
bring legal action in enforcing his rights, by shortening it from the the time allowed
under the Limitation Act (six years for contract), is void to the extent of the
restriction.
A clause which requires a party to first submit to arbitration is valid but it is not
so for any clause which restricts any decision made by arbitration to be appealed
to the courts. Such a clause is void to the extent of the restraint.
Generally, all parties to such contracts will not get any rights when enforcing
the contract. This principle is a based on the maxim ex dolo malo no oritur
actio which means that a court „would not give any help to a person whose
action arises from an unlawful act.‰
(ii) If the Plaintiff Does Not Know that the Agreed Contract was Unlawful
According to Section 66 of the CA 1950, if the other party knew that the
said contract is unlawful, he would not be allowed to claim for the
return of benefits or any compensation.
Example: Ali bought a provision shop situated in Klang from Faizal. Faizal
agreed not to carry out the same trade in Klang and Ipoh. The two covenants
can be severed and only FaizalÊs promise not to carry out the same trade in
Klang is binding but not the one in Ipoh.
SELF-CHECK 3.2
EXERCISE 3.3
Section 2(i) means that if the said contract has the elements which can make it
voidable, the innocent party has the option to make the contract void and set aside
his duties under the contract. The guilty party of a voidable contract has no such
option.
It must be noted that if the innocent party does not use the option to rescind the
contract, there will still be a binding contract on both parties.
„⁄..agreements are contracts if they are made by the free consent of parties
competent to contract⁄..‰
Definition
„Two or more persons are said to consent when they agree upon the same
thing in the same sense‰.
Under the law, consent exists when there is a meeting of the minds between the
contracting parties and they agree on the same thing. „Free consent‰ is defined in
Section 14 of CA 1950 .
Figure 3.1 shows five elements which deem that consent is not freely given.
Section 14 provides:
„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‰.
Section 14 stipulates that a personÊs consent to enter into a contract is not free, if at
the time he is making the contract, his consent to it was due to any one of the five
elements, that is coercion, fraud, mistake, undue influence or misrepresentation.
As seen from Figure 3.1, if any of the elements in paragraph (a) to (e) of Section 14
exists, then there is no free consent. Their existence in a contract will cause the
contract to be voidable at the option of the party whose consent was given due to
any one of those elements. It means that the innocent party would not have
consented to the contract if not due to the five elements which caused him to
consent unfreely.
3.4.1 Coercion
It is defined in Section 15 of the CA 1950 as:
Although the act forbidden by the Penal Code was committed where the Penal
Code is not applicable, it is still considered as coercion according to the first limb
of Section 15 of the CA 1950 if it involves Malaysians and is brought to the
Malaysian courts.
Jack threatened to kill Ben (threat made in London) if Ben refused to sign an
agreement. Threatening to kill is a crime under the Penal Code. If Ben brings his
case to the Malaysian courts alleging that there was coercion which forced him to
give consent unfreely, the court would decide that there was coercion according to
Section 15, even if the act forbidden by the Penal Code was committed outside
Malaysia.
Reference can be made to several cases, such as Kesarmal s/o Letchman Das v.
Valiappa Chettiar (1954). It was held that the transfer of land executed under the
orders of the Sultan, issued in the ominous presence of two Japanese officers, was
voidable at the option of the party coerced into giving his consent.
In Chin Nam Bee Development Sdn. Bhd v. Tai Kim Choo & Ors (1988), the
respondents purchased certain houses to be constructed by the appellants. They
signed a sales and purchase agreement for the house priced at RM29,500. The
appellants later instructed the respondents to pay an additional sum of RM4,000,
failing which the appellant threatened to cancel their booking for the house. It was
held that the additional payment was not voluntarily made but under threat. The
court ordered the appellants to refund the respondents for the additional
payments made.
What happens if any sum of money or property had been transferred under a
voidable contract? Refer to Section 66 of the CA 1950 for the answer.
Section 65 of the CA 1950 stipulates that when a person makes the option to rescind
a voidable contract he must restore the benefit to the person from whom it was
received from.
Section 73 of the CA 1950 provides that a person to whom money is paid under a
voidable contract must repay or return it to the person he had coerced.
Based on Section 16, there are two elements that must be present for the contract
to be categorised as one made under undue influence. They are:
(a) The existence of a close relationship between the parties and in that
relationship, one of the parties was in a dominant position.
(b) The party who is in a dominant position made use of that position to obtain
an unfair advantage over the other.
Both elements must be present to determine whether consent when given was due
to undue influence or not. How do you decide whether a person was in a dominant
position? Reference can be made to Section 16(2)(a) and (b) of the CA 1950.
Question: Who holds the real authority over another person? A relationship
between a father and a son is given as an example. A father has a real or apparent
authority over his son. Refer to Illustration (a) Section 16 of the CA 1950.
There is a relationship between a father and his son. Is the father in a position
where he can dominate his sonÊs will? The answer is yes. According to Section
16(2)(a), a father does hold a real or apparent authority over his son.
What about the relationship of trust according to Section 16(2)(a)? The Section
refers to parties who stand in a fiduciary relationship to the other party and are
under an obligation to execute that duty with care, such as, the relationship
between a doctor and his patient, a lawyer and his client, a trustee and beneficiary
and others. They cannot give any advice that promotes their particular interests.
Refer to Illustration (b) Section 16 of the CA 1950.
Illustration (b) is also in reference to Section 16(2) (b), a presumption that a person
is in a dominant position if he enters into a contract with a person whose mental
capacity is affected by any illness as such. Refer Section 16(2) (b) to Illustration (b)
of that Section.
It must be noted that although a person may have been proven to be in a dominant
position, the contract made is still valid if he did not use that position to gain an
unfair advantage over the other party.
What will happen if a party succeeds in proving the existence of undue influence
by complying with the requirements of Section 16 (1)?
The burden of proof is stated in Section 16(3) of the CA 1950. The provision is
similar to the point made in Raghunath. Refer to Illustration (c) of Section 16 of the
CA 1950.
An instance where one party was unable to rebut the presumption of undue
influence arose in Inche Noriah v. Shaikh Allie bin Omar (1929). The person (the
nephew) who was said to use undue influence upon the other party (an old, feeble
and illiterate aunt) who had sought her lawyerÊs advice before signing the contract
assigning her property to the nephew, failed to rebut the presumption of undue
influence. If it was so proven, it would mean there was free consent because the
person in the position to be dominated understood the effect of the contract she
had signed.
In Chait Singh v. Budin bin Abdullah (1918) , the court presumed that there was
undue influence based on the facts of the case when a moneylender lent money to
an illiterate at an excessively high interest rate of 36 per cent.
In Datuk Joginder Singh & Ors v. Tara Rajaratnam (1983), the court held that there
was undue influence by the appellants as the appellants were the respondentÊs
lawyers and had a fiduciary duty to the respondent. The appellantÊs conduct in
influencing the respondent to transfer the title of the respondentÊs land to the
second appellant caused it to be void. The appellant also failed to rebut the
presumption of undue influence in the transaction.
However, the innocent party has the right to make the contract voidable at his
option. In fact, he has two options based on whether any benefits had passed to
the other party or not. Let us look at the two options:
(a) If the party who has the right to rescind the contract has not received any
benefits under the contract, the contract may be set aside absolutely. Refer to
Illustration (a) of Section 20 of the CA 1950.
(b) If the party who wants to rescind the contract has received any benefits under
the contract, it can be set aside upon such terms and conditions as the court
may seem just. Refer to Illustration (b) of Section 20 of the CA 1950.
In Chait Singh v. Budin bin Abdullah (1918), the court reduced the interest rate
from 36 per cent to 18 per cent.
In cases where the parties have received any benefit under a voidable contract,
the court may use Section 66 of the CA 1950 to make a restoration order on the
benefit or to give compensation.
EXERCISE 3.4
3.4.3 Fraud
This definition must be read together with Section 17(a) to 17(e). Refer to Section
17(a) to 17(e).
Definition
„⁄⁄⁄.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) Suggestion, as to a Fact, of that Which is Not True by One Who Does Not
Believe it to be True
This provision is similar to the requirements for fraudulent
misrepresentation under the English law of tort. However it is termed as
fraud under the CA 1950. Therefore, the elements that need to be proven are
quite similar under English law and the CA of 1950. Under English law, there
is no need to prove intent to deceive to establish fraudulent
misrepresentation.
Kheng Chwee Lian gives an example of one party making a statement which
he believes to be untrue to deceive the other party to enter into a contract.
(b) Active Concealment of a Fact by a Person Who Knew or Belief in the Fact
See Illustration (c) Section 19 of the CA 1950.
„B, having discovered a vein of ore on the estate of A, adopts the means to
conceal it. He conceals the existence of the ore from A. Due to AÊs ignorance,
B was able to buy the estate at an undervalued price. The contract is voidable
at AÊs option‰.
The general rule is that silence does not constitute fraud. Refer to Illustration (a) of
Section 17 of the CA 1950.
The defendant at an auction sold a piece of land to the plaintiff. It was sold at an
undervalued price because the defendant mistakenly believed it to be
undeveloped land. The defendant refused to continue with the contract after
realising the mistake, and alleged that the plaintiff should not be allowed to gain
any benefits out of the information that he knew but concealed from the defendant.
It was held that the plaintiff was not bound to disclose the said information to the
defendant.
Provision
Silence is fraud according to the explanation in Section 17 if:
(a) It is the duty of the person keeping the silence to speak,
(b) His silence is, in itself, equivalent to speech.
Example: A wants to take out a life insurance policy with MNI Insurance
Company. A is under a duty to inform the insurance company regarding
matters relating to his health and familyÊs health history and of any
hereditary diseases present.
If you have any factual information in respect of the contract that you are going to
sign, to what extent do you feel obligated to disclose the information to the other
party?
(a) A contract is valid if the person whose consent caused by fraud had the
means of discovering the truth with ordinary diligence; and
(b) A contract is valid if the committed fraud did not cause consent to be given
involuntarily.
EXERCISE 3.5
1. A offered his car for sale to B. B asked A „If you do not deny it,
I shall assume that the car was never involved in any accident‰.
A kept quiet and B bought the car. B later found out that it was
once involved in an accident. B therefore wishes to rescind the
contract. Can B do so?
A. Illegal
B. Coercion
C. Undue influence
D. Immoral
Definition
Innocent misrepresentation refers to any misrepresentation made by a
person without intent to deceive and of which he himself believed to be true.
Example: A, who wished to sell his handphone to B, told him it had never dropped.
Without AÊs knowledge, his son had once dropped it. A, here had made an
innocent misrepresentation, that is, he himself believed it as true and had no
intention to deceive B. Refer to Section 18 of the CA 1950.
In Bisset v. Wilkinson (1927), the respondent agreed to buy land for sheep farming.
He agreed because he relied on the appellantÊs statement that he estimated the
land would carry 2,000 sheeps. Nobody else, including the appellant, had carried
out sheep farming on the land in question. The respondent wished to rescind the
contract due to misrepresentation. It was held that the contract was valid and
could not be rescinded because there was no misrepresentation. The appellantÊs
statement was merely an honest opinion and not a statement of fact.
(b) Exceptions: When Misrepresentation Does Not Make the Contract Voidable
However, there are exceptions to the rule, that is, when contracts are
innocently misrepresentated and do not influence the other partyÊs consent
to sign the contract. What are those situations? Refer to the Exceptions in
Section 19.
Earlier on, we have earlier learned about them in the subtopic of „fraud‰.
Provision
If such consent was caused by misrepresentation or by silence, fraudulent
within the meaning of Section 17, the contract, nevertheless, is not
voidable, if the party whose consent was so caused had the means of
discovering the truth with ordinary diligence.
If the concerned party has the means to discover the truth of the facts given
to him, then he must do just that. This exception is only available to the party
who committed fraud by silence and innocent misrepresentation according
to Section 18 of the CA 1950.
In J.C Weber v. E.A Brown (1908), this exception could not be relied by the
defendant because he had committed fraudulent misrepresentation.
Therefore, it was not relevant whether the plaintiff could have investigated
it or not. The contract was voidable at the plaintiffÊs option. Refer to
Illustration (b) Section 19 of the CA 1950.
EXERCISE 3.6
3.4.5 Mistake
What is the effect of an agreement where both parties to a contract enter into it
due to some misunderstanding over some material facts in the contract?
Definition
In simple terms, mistake means „error‰.
Mistake and its effects are provided for in Sections 21, 22, and 23 of the CA 1950.
More attention should be given to the effects of mistake because different types of
mistakes have different effects. Even though, in general, a contract due to mistake
is a void contract, there are certain types of mistakes which give rise to a valid
contract.
We will now discuss each type of mistake. Mistakes can be divided into three
types, as shown in Figure 3.2.
Provision
„Where both parties to an agreement are under a mistake as to a matter
of fact essential to the agreement, the agreement is void‰.
This provision means that a contract is void if both parties to a contract made
an error on a matter of fact essential to the agreement. Mistakes which can
make a contract void are those made based on the matter of fact and not a
personal opinion on the value of the suject matter in the agreement. Refer to
the Illustration in Section 21.
It is clearly seen from the Illustration in Section 21 of the Act, that the facts
on which both parties were mistaken of are essential facts and were the
subject matter of the agreement.
(i) Both Parties to the Contract were Mistaken on the Same Essential Fact
In Courturier v. Hastie (1856), there was a contract of sale of corns. Both
parties believed the corns were in transit from Salonica to England. The
corn were in fact spoiled due to hot weather and were already sold in
Tunis before the contract was signed. The buyer alleged that since there
were no corn when the contract was signed, he need not pay the
purchase price. The seller claimed otherwise. The court held that there
was no contract between the seller and the buyer because they were
mistaken over the existence of the subject matter of the agreement.
Therefore, the buyer was not liable to pay.
(ii) Both Parties to the Contract were Mistaken on Different Facts Which
Leads to Mutual Misunderstanding
Both parties under this situation negotiated at cross-purposes and
therefore there was no contract.
In Raffles v. Wichelhaus (1864), the buyer agreed to buy from the seller,
a cargo of cotton to arrive „ex Peerless from Bombay„ to London.
Unknown to them, there were two ships called Peerless sailing from
Bombay, one sailing in October and the other in December. The buyer
and the seller were referring to two different ships – the buyer meant
the earlier one and the seller the later. It was held that there was no
contract.
In Seck v. Wong & Lee (1940), the plaintiff, a building contractor asked for a
work plan from the defendant, an architect. The defendant asked for the
payment of RM500 for the plan. There is a law against such payment. The
plaintiff paid without being aware of that law. After realising the position of
the law, the plaintiff sued the defendant for a refund.
It was held that the plaintiffÊs mistake as to the law would not result in the
rescinding of the contract. Therefore, he could not get a refund. However, in
this case, the court allowed the plaintiffÊs claim on equitable grounds and
justice because the defendant was found to have taken an unfair advantage
over the plaintiff for personal gain.
This means that the contract is valid if only one of the parties was under a
mistake as to a fact in the contract. The court however may hold such a
contract voidable if the party who was not under the mistake knew that the
other party was under a mistake as to a matter of fact, but he did not take
any necessary steps to rectify or correct it. This was decided in Taylor v.
Johnson (1983).
A contract where one of the parties made a mistake as to a matter of fact, may
be a voidable contract in the following situations:
• The other party to the agreement knew that he is not the person
with whom the contract should be made with.
• The party under mistake had taken reasonable steps to identify the
person with whom he would be dealing with.
The court held that the respondent could recover the goods because the
contract between Blenkarn and the respondent was void due to mistake
as to identity.
There are however exceptions allowing the courts the power to set
aside the general rule, that is, when the maxim non est factum (it is not
his deed) applies.
It was held that there was a mistake as to the type of instrument signed
and, therefore, the first defendant was not liable to the contract.
In Malaysia, mistake as to law will not result in the rescinding of the contract.
A contract is void and therefore may be rescinded if the mistake is as to a law not
in force in Malaysia.
Mistake by one party (unilateral mistake) as to a matter of fact will not affect the
validity of a contract unless it is a mistake as to identity or mistake as to the type
of document.
Section 66 of the CA 1950 may be used for claiming the return of any benefits which
passed under void and voidable contracts (if the option to rescind it was exercised)
due to mistake. Refer to Illustration (a) Section 66 of the CA 1950. The court may
also order that compensation be paid when allowing any of the parties to rescind
the contract. This is within the courtÊs discretion as provided by Section 37 of the
Specific Relief Act, and is usually used by the courts exercising equitable principles
and justice. This Section provides:
„On adjudging the rescission of a contract, the court may require the party to
whom the relief is granted to make any compensation to the other which justice
may require‰.
The court may also order rectification be made if both parties wish to continue
with the contract. This is provided for in Section 30 of the Specific Relief Act 1950,
which stipulates:
In Oh Hiam v. Tham Kong (1980), the court ordered rectification be made in the
contract when both parties were under the mistake in respect of a piece of land
which should not be included in the contract.
EXERCISE 3.7
2. Auntie Bee, ill from old age, transferred her property to a nurse
who took care of her while she was sick. After she died, her son
objected to the transfer and decided to bring the matter to court.
He wants to rescind the transfer on the ground of undue influence.
What is your advice to Auntie BeeÊs son?
• Generally, all parties involved in void contracts which are unlawful will not
get any rights when enforcing the contract. Therefore money promised under
illegal contract cannot be claimed even if the promisee had done his part under
the contract.
• Contract in restraint of trade or legal proceedings are not entirely void. Such a
contract is void to the extent of the restraint only.
• A voidable contract means that the contract is valid and binding until the party
whose consent is so caused chooses to rescind it.
− It is forbidden by a law;
− It is fraudulent;
Coercion Mistake
Fraud Restraint
Illegal contracts Undue influence
Immoral agreement Voidable
Misrepresentation
Wu, M. A., & Vohrah, B. (2004). The commercial law of Malaysia. Petaling Jaya,
Malaysia: Pearson Education Malaysia Sdn Bhd.
INTRODUCTION
In the previous topics, you have learnt that there are several elements that should
be fulfilled before a valid contract can be formed. Now, in this topic we will discuss
the various ways of discharging a contract. Normally, a contract is discharged
when both parties perform what they have promised in their contract. Sometimes,
the parties may also discharge their contract either by agreement, due to
frustration or by breach. If a breach of contract occurs, the innocent party can claim
for remedies. These remedies will be discussed in the last part of this topic.
Referring to Figure 4.1, you can say that there are four ways to discharge a contract,
namely by performance, frustration, agreement and breach. In the coming
subtopic, we will discuss in detail the four ways and some of their consequences.
Section 38 (1):
The parties to a contract must either perform or offer to perform their respective
promises, unless such performance has been dispensed with by law.
Ahmad agreed to sell his camera to Danish for RM500. Danish agreed to buy the
camera for the said price. In this situation, Ahmad will be discharged by the
contract after he has delivered the camera to Danish. Meanwhile for Danish, he
will be discharged from the contract after he has fully paid the price of RM500. If
Danish failed to do so, only Ahmad is discharged from the contract, while Danish
is still bound to perform the contract according to what has been agreed.
However, not all contracts can be successfully concluded. In such situations, the
contracts are discharged and categorised into various types of discharge as
explained in the following subtopics.
Another important point that you should take note of is that discharge by
frustration can only be applied when the impossibility of performing the contract
arises without the fault of either party.
In addition, you can refer to the below case which is a real example of agreement
discharge by frustration. The case, known as Robinson v. Davidson (1871) 6 L.R.
Exch. 269, goes as follows:
In this case, the contract was that the defendant must play the piano at a concert
on a specified date. On the specified date, the defendant was unable to perform
as she was ill. It was held that the contract was discharged by frustration.
Reflecting on the above Section 57 (2), you can say that a contract which is
discharged by frustration can be ended automatically without being
voidable.
In this case, the promisor who was supposed to perform the agreement
but discharged it, is accountable to pay the compensation to the promisee.
Next, we will look at the third and the last consequence of discharging an
agreement by frustration. The third consequence goes as follows:
You should remember that under the above Section it is the duty of a person
who has gained the benefits from the agreement to pay them back, which are
quite similar to the case of voidable contracts and void agreements.
You may also refer to Illustration (d) to Section 66 which provides that:
However, Section 12 of the Specific Relief Act provides that there must
be a total destruction of the subject matter of the contract. The contract
will not be discharged by frustration if only part of the subject matter
of the contract has been destroyed.
For your information, when both parties to the contract agree that the contract
should no longer continue, both the parties are discharged from their obligations.
In other words, you can say that the contract comes to an end by the agreement of
both promisor and promisee.
Furthermore, the contract may also be discharged by the agreement of all the
parties in the form of a waiver, release or remission. This is based on Section 64 of
the Contracts Act.
If the promisee waives his rights under the contract, then the original contract is
discharged and the promisee is already bound to his waiver of performance.
Firstly, you should be alerted that, if one of the parties to the contract indicates to
the other either by conduct or in clear terms an intention not to go on with the
contract, the party is said to have rejected the contract.
Moreover, a refusal to perform a contract may occur before the time that the
performance is due, or during the time of performance itself. In this case, you
should take note that a refusal to perform a contract when performance is due
would amount to a discharge.
When there is a breach of contract, the party not in breach has the option either to
continue with the contract or to rescind it. If he chooses to rescind it, the contract
is discharged. You may refer to illustration (a) of Section 40 of the Contracts Act,
for a better understanding.
A, a singer, enters into a contract with B, the manager of a theatre, to sing at his
theatre for two nights every week during the next two months, and B engages to
pay her RM100 for each nightÊs performance. On the sixth night, A wilfully did not
turn up at the theatre. B is at liberty to put an end to the contract.
Based on the above illustration, when A wilfully absents herself from the theatre
she actually has breached her contract with B. Since B is not the defaulting party,
she is entitled to discharge the contract.
You may also refer to the case of Ban Hong Joo Mine Ltd v. Chen & Yap Ltd (1969),
where in this case the appellant had refused to make fortnightly payments for the
work that had already been done by the respondent. The appellant also ordered
the respondent to stop his or her work. It was held that the respondent can treat
the contract as being repudiated and he or she is entitled to sue the appellant for
the work that has been done.
Consequences of Breach
Similar to the previous subtopic, discharging a contract by breach also has its own
consequences. The first consequence goes as follows:
The respondents decided to put an end to the contract and purported to forfeit the
advance paid. The appellant sued to recover the sum paid under the contract
relying on a joint reading of Sections 39, 64 and 65 of the Indian Contract Act which
are similar to Sections 40, 65 and 66 of our Contracts Act. The Privy Council held
that Section 64 of the Indian Contract Act (Section 65 of Contracts Act 1950) applies
both to a contract which was put to an end under Section 39 (Section 40 of
Contracts Act 1950) as well as to cases of recission ab initio. Thus, appellant was
entitled to recover from the respondents the sum paid under the contract.
The above decision was followed in Yong Mok Hin v United Malay States Sugar
Industries Ltd. (1967). The Federal Court held that when a contract is rescinded,
besides Section 65, Section 66 of the Contracts Act applies as well.
The second consequence will provide you with a different picture on this matter.
The consequence goes as the following:
If the innocent party has paid money under the contract, he may be entitled to
recover the sum paid.
This is to show you that the person who has paid the compensation may recover
the sum paid in certain circumstances. Therefore, we hope that this subtopic will
enlighten you on this particular issue.
SELF-CHECK 4.1
EXERCISE 4.1
In addition to that, we invite you to take a close look at Figure 4.2 on some of the
remedies. The remedies for breach of contract are as follows:
4.2.1 Damages
To begin with, you should take note that, damages are granted to a party as
compensation for the damage, loss or injury he or she has suffered through a
breach of contract. In this case, an award of damages aims to put the plaintiff
in the position he would have been in if the contract had been performed.
Classification
Explanation
of Damages
Nominal damages A token award granted by the court where the plaintiff
has proved the defendantÊs breach but he has suffered
no actual loss.
In this case, the plaintiff was a mill owner. He hired the defendant, a
carrier to take a broken crankshaft to Greenwich and asked for a new one.
The defendant (carrier) promised that it would be there the following day,
but the defendant had delays in transporting the crankshaft.
Consequently, the replacement was not delivered on time. The mill
remained idle for a longer time. The plaintiff sued for damages under two
heads:
(ii) For the loss of profit caused by the mill remaining idle.
The House of Lord allowed the damages under the first head but
disallowed damages under the second head as the defendant was not
informed of the special circumstances.
The rule based on the judgement in the case mentioned above has been
adopted in Section 74 (1) of the Contracts Act.
The court held that the laundry company was entitled to recover for the
profits for ordinary laundry as the defendant must foresee their loss if
there was delay. However, the plaintiff was not entitled for dyeing
work because the defendant was not informed about that.
Another section is Section 75 of the Contracts Act. This section deals with the
compensation for breach when the amount of damages is already stipulated
in the agreement.
In this situation, if there is a breach of contract, the party in default must pay
damages up to the amount stipulated in the contract.
It was held that it was the duty of the respondent in this case to take
reasonable steps to mitigate the damage.
There was no need for the respondent to have gone to the expense of
buying logs from elsewhere when the logs were lying a few hundred feet
away from the sawmill and all that was required was the additional
expense for hauling them up to the sawmill. The appropriate damages to
be awarded to the counter-claim was the approximate cost of hauling the
logs to the sawmill, which amounted to RM1,000.
You should also be alerted that specific performance is only an optional remedy.
Table 4.2 will discuss why specific performance is considered as an optional
remedy.
Section 20(1)(a) The court will exercise its discretion not to decree specific
performance where damages will provide an adequate remedy.
Section 20(1)(c) Specific performance will be refused where the terms of the
contract are uncertain.
Section 21 The court has discretion to refuse specific performance where the
granting of it would cause undue hardship to the defendant.
Apart from the above details, you should know that specific performance may
also be granted in cases where actual damage cannot be ascertained.
4.2.3 Injunction
What is injunction? According to the Merriam Webster online dictionary,
injunction could be defined as a writ granted by a court of equity whereby one is
required to do or to refrain from doing a specified act.
You should take note that there are different types of injunctions in Malaysia.
In order to provide you with a better picture on these types of injunctions,
we encourage you to study the following Table 4.3:
Interlocutory injunction Used by a party to maintain the status quo of the subject
matter in a pending suit.
Referring to Table 4.3, you should realise that there are three main injunctions:
interlocutory, mandatory and prohibitory injunctions. Each injunction has its own
role and function under the law. You would need to read further on the differences
between the three injunctions.
Apart from that, you should note that an injunction is an equitable remedy.
The term „equitable‰ suggests that the remedy is just and reasonable according to
the law. Thus, it can be varied or dissolved if the court discovers that the
application for injunction was made on suppressed facts or that the facts upon
which the order was granted no longer exist.
ACTIVITY 4.1
Basically, this website provides you with vast explanations on legal terms
which would be a useful reference for this module.
EXERCISE 4.2
3. Jojo has entered into a contract to sing at Putra Musical Hall for
RM15,000. The company already paid her RM5,000 in advance.
Two days before the performance is to take place, Jojo received a
better offer from another company to perform at a different venue
on the same day. She accepted the offer and did not turn up for
performance at Putra Musical Hall. Advise the parties.
• Where there has been a breach of contract, the aggrieved party will be entitled
to claim for remedies. Remedy is the way by which an innocent party enforces
his or her rights or corrects a loss.
• There are several remedies available for a breach of contract, such as, damages,
specific performance, injunction and quantum meruit.
Breach Frustration
Consequences Injunction
Damages Quantum meruit
Discharge Specific performance
INTRODUCTION
The laws in respect of agency are provided in the Contracts Act 1950 from Section
135 to Section 191.
In other words, a principal may appoint an agent and give him authority to carry
out certain duties on his behalf as stipulated in a contract of agency.
In Miss Gray Ltd v. Cathcart (1922), where a woman purchased clothes worth
£215 on her husbandÊs credit. Her husband refused to pay for the clothes. He
was able to prove that his wife was given an allowance for £960 a year. The
court found her husband not liable for payment.
In Mercantile Credit Co. Ltd. v. Garrod (1962), A, one of the partners sold a
car to a finance company and credited the sales money into the partnership
account without the consent of his partner, B. The finance company took
action when they found out that there was fraud in the sales. The court held
that B was entitled to recover the money from A.
„When acts done by an agent for his principal, where the principal has no
knowledge or does not give authority to do so to the agent, the principal
may elect to ratify or to disown the agentÂs act. If he elects to ratify them, it
has the effect as if they had been performed by his authority‰.
(ii) Agent expressly acts as an agent for the principal and not on his own
name.
In Keighley Maxted & Co. v. Durant (1901), R, KeighleyÂs agent was
authorised to buy wheat for the company at a certain price but bought
them at a higher price from D. R bought in his own name but intended
to buy for Keighley. Keighley agreed with R to take the wheat at that
price but failed to take delivery. The court held that Keighley was not
liable because the agent bought it in his own name and Keighley did
not ratify it.
(iii) The principal must have contractual capacity at the date of the contract
and at the date of ratification.
In Kelner v. Baxter (1866), at the time the agent entered into a transaction
with a third party, the principalÊs company was about to be formed. The
court therefore held that the company had no contractual capacity to
make the contract since it did not exist at that time.
(iv) The principal must at the time of ratification have full kowledge of all
material facts unless it can be shown that he intends to ratify the
contract, whatever the facts may be.
(vi) The ratification must not injure a third party. Section 153 provides that
the ratification of an agentÂs act must not result in a third party to suffer
damages or terminate his right or interest.
When an agentÊs act which was originally not valid is ratified by his
principal, the ratification has these effects:
• The ratification will validify entirely or wholly the act of the agent;
„An agent has authority, in an emergency, 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 his own case, under similar circumstances.‰
The case of Great Northern Railway Co. v. Swaffield (1874) should be jointly
referred to with the above provision. A horse was sent by train and the owner
was not there to receive it. The railway company decided to put it in a stable
for the night. The court held that the railway compay acted as an agent by
neccessity.
The court held that the railway company were liable to the principal on
the sale because they should have communicated with him and asked
for his instructions as soon as the goods arrived and at the time they
wanted to take such action.
EXERCISE 5.1
3. What are the three conditions which must be satisfied for the
creation of an agency by neccessity?
4. „A husband is liable for any debts made by his wife with a third
party‰.
Tables 5.1 and 5.2 will explain agencies in detail according to their jurisdiction and
functions.
Agency
According to Explanation
Jurisdiction
Universal Has extensive power as what a principal may personally have. The
powers given to this kind of agent is by a deed of a Power of Attorney.
Agency
According to Explanation
Functions
Factors An agent who is entrusted with the goods of the principal for sale and
sells it on his own name. The agent has a lien over the goods, if the
principal fails to make payments.
Bankers Can be viewed from two perspectives, that is, as an agent for a
customer when dealing with the customer and as an agent for the
bank because they are bank employees.
However, Section 139 states that the authority of an agent may be either express or
implied.
Definition
Actual or express authority is defined according to Section 140 as words
spoken or written and implied authority as „inferred from the circumstances
of the case, and things spoken or written, or in the ordinary course of
dealing⁄‰
SELF-CHECK 5.1
You have learned about the authority of an agent while carrying out his
duties. Give examples of situations where both authorities of an agent
are present.
Duties of an agent to his principal are provided under Section 164 to Section 178
of the Contracts Act 1950 (hereinafter referred to as CA 1950). Refer to Figure 5.3
for its illustration.
In Turpin v. Bilton (1843), the principal instructed his agent to take out an
insurance on his ship but he failed to do so. The court held that the agent was
liable for damages when the ship was lost. The same principle was also
applied in Bostock v. Jardine (1865).
(b) To Exercise Due Diligence in the Performance of His Duties and to Apply
Such Skills as He Possesses
An agent employed for his special skills must carry out his duties and display
such skills. The agent must always act diligently, skilfully and with due care.
An agent will be made liable due to negligence, lack of skill or misconduct.
Refer to Section 165 of CA 1950.
„An agent has authority, in an emergency, 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 his own case, under similar circumstances‰.
(e) Not to Let His Own Interest Conflict with His Duty – Illustration (A) of
Section 168 of the CA 1950
„A directs B to sell AÊs estate. B buys the estate for himself in the name of C.
A later on discovering that B has bought the estate for himself, may repudiate
the sale, if he can show that B has dishonestly concealed any material fact, or
that the sale has been disadvantageous to him‰.
In Wong Mun Hai v. Wong Tham Fatt (1987), an agent was found to have
sold his principalÊs land to his own wife well below market value. The agent,
therefore had acted in conflict with his duty.
(f) Not to Make Any Secret Profits Out of the Performance of His Duty
Section 168 also states that an agent is not allowed to make any secret profits.
It may happen that in carrying out his duty for a third party by using his
principalÂs property, the agent made some extra profits for himself, but if the
principal knew and consented to it, the agent is entitled to keep the profit.
If the principal does not consent to the agentÊs act of keeping the secret profit,
the principal has the following remedies:
(i) May repudiate the contract agreed between the agent and the third
party.
(ii) To recover the amount of the secret profit from the agent.
In Tan Kiong Hwa v. Andrew S. H. Chong (1974), an agent received an
instruction to sell a flat for $45,000. Instead of selling it at that price, the
agent sold it for $54,000 and made a profit of $9,000. The court held that
the principal was entitled to recover the $9,000 from the agent.
(iii) May refuse to pay the agent his commission or other renumeration.
Section 173 of the CA 1950 provides that:
(v) May sue the agent and third party giving the bribe.
In Mahesan v. The Government Officers Cooperative Housing Society
(1978), an agent received bribes amounting to $122,000 from a land
vendor. It was for keeping a secret from the principal as to the real
value of a land. The court held that the principal was entitled to sue for
the amount of bribe received by the agent.
„An agent may retain, out of any sums received on account of the principal
in the business of the agency, all money due to himself in respect of
advances made or expenses properly incurred by him in conducting such
business, and also such renumeration as may be payable to him for acting
as agent‰.
According to the two above provisions, an agent must render all money he
received during the execution of his duties, after deducting the permitted
amount such as any advances which he made and any commissions
promised by his principal.
If a principal fails to pay the promised commission to the agent, the agent is
entitled to retain the money on a lien until he is paid.
EXERCISE 5.2
1. Jack was instructed by his principal to send his car for rent to Chew.
However, Jack used the car to bring his family for sightseeing and
was involved in an accident. The car was badly damaged. Who
must be liable for the loss suffered due to the damaged car?
After having discussed an agentÂs duties, the next discussion will focus on the
duties of a principal. The two duties are as follows:
(b) To Indemnify for Acts Lawfully Done in the Execution of His Authority
Section 175 of the CA 1950 provides that „the employer of an agent is bound
to indemnify him against the consequences of all lawful acts done by the
agent in exercise of the authority conferred upon him‰.
(b) Where an Agent Contracts for an Unnamed Principal but Discloses His
Existence
In this case, even if the third party does not know the name of the principal,
it is sufficient for him to be aware that the agent is acting for a principal. The
agent is therefore not liable. In Universal Steam Navigation Co. Ltd. v.
McElvie & Co. (1923), X, an agent to a shipowner, made a charterparty with
J. M. & Co. and it was signed „for and on behalf of J. M. & Co. (as agents), J.
A. M. X knew when the charterparty was signed that J. M. Co. was acting as
agents for another but did not know who the principal was. There was a
breach of contract and the shipowner sued for damages from
J. M. & Co. The court held that J. M. &Co. was not liable to pay damages
because they were only agents.
„A enters into a contract with B to sell him 100 bales of cotton, and afterwards
discovers that B was acting as agent for C. A may sue either B or C, or both,
for the price of the cotton‰.
„An agency is terminated by the principal revoking his authority; or by the agent
renouncing the business of the agency, or by the business of the agency being
completed, or by either the principal or agent dying or becoming of unsound
mind, or by the principal being adjudicated or declared a bankrupt or an
insolvent‰.
(i) Termination by mutual agreement between the principal and the agent.
• In this case, if the agent has carried out part of the principalÊs
instructions, termination is only effective:
– Against the agent after it becomes known to him.
– Against the third party after it becomes known to them.
• If the agent has carried out part of his duties, revocation is not
effective on the part of duty already carried out by the agent.
SELF-CHECK 5.2
State the effects of contract if these situations take place:
(a) Yusof, an agent to Cepat Kaya Company named Encik Ghazali as
his principal.
Effect:
(c) Samerin, an agent to Bernas Insurance Co. did not name and
disclose to Jefri, a third party, as to the existence of his principal.
Effect:
EXERCISE 5.3
1. Discuss the three duties of an agent as stated in the Act and support
your answer with relevant cases.
• Both agent and principal have to observe several duties and obligations as laid
down under statutes and also as specified in their agreement.
Agency Factors
Auctioneer General agent
Bankers Principal
Brokers Special agent
Del credere agent Universal agent
Drawer
INTRODUCTION
You have learned the law of contract in detail in the earlier topics. Now you will
be learning the law related to the sale of goods. Whether in theory or in practice,
this is important to us as we are involved in selling and purchasing goods on a
daily basis. The law which governs these activities is the Sale of Goods Act 1957
(hereinafter referred to as the SGA 1957).
We will be studying the definition of goods, terms under the sale of goods
contracts, principles for transfer of title, performance of contract, unpaid sellerÊs
right and remedies claimable for a breach of contract.
Based on this definition, nearly every movable thing are goods except money and
actionable claims for debts or others.
The goods which form the subject of a contract of sale may be either existing
goods, owned or possessed by the seller, or future goods.
There are two types of goods. Explanation about these types are given in Table 6.1.
Types of
Explanation Example
Goods
Existing Goods possessed or owned by the A asked a car salesman to sell his
Goods seller at the time the contract of sale car. The car is his. The car needs to
was made. Why does Section 6(1) be in the salesmanÊs possession
differentiate between goods while waiting for a sale to be
possessed and goods owned by the made. This shows that a seller is
seller? This is because the goods in not necessarily the owner of the
his possession need not necessarily car.
be goods that he owned.
Future Goods to be manufactured, Purchasing of a car. When buyer and
Goods produced or acquired by the seller seller reach an agreement for the sale
after a contract of sale has been of a car and detailed specifications
made. are given, the seller will prepare a
contract of sale. The car will then be
manufactured and produced
according to the detailed
specifications.
Both types of goods can be further classified into two, which are:
(a) Specific goods or ascertained goods are goods seen and identified by the
buyer; and
(b) Unascertained goods are goods identified by description only.
SELF-CHECK 6.1
List down four examples of both types of goods that you have learnt.
Definition
A contract of sale of goods is a contract whereby the seller transfers or agrees
to transfer the property in goods to the buyer for a price.
When a contract of sale involves existing goods, the contract is called a sale. A
transaction which involves future goods is called an agreement to sell. This is
because the property is to be transferred in future or is subject to several conditions
that need to be complied with.
Section 4(4) SGA 1957 states that 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.
Price is usually meant in the form of money and Section 9 of SGA 1957 provides
that price can be fixed as follows:
(b) Price can be fixed in a manner agreed by the contract, for example, by a third
party.
(c) Price can also be fixed by the course of dealing between the parties.
Example: Nasir made a contract to supply office stationery for a year to
Zahid. However, if Nasir continued to supply the stationery even after the
contract period had expired, the conditions in the original contract will be
binding on both parties.
(d) If price is not fixed, the buyer shall pay the seller a reasonable price.
Section 5(1) of SGA 1957 also permits a contract of sale be made by:
(a) Immediate delivery of the goods but payment is made later; or
(b) Immediate payment of the price but delivery is made later; or
(c) Both payment and delivery are made immediately; or
(d) Delivery is made but goods are paid by instalments.
A contract of sale requires the elements of offer, acceptance and price for its
formation. It may also be made in writing or by word-of-mouth, and under some
circumstances, be implied by the conduct of the parties to the contract.
Definition
A condition is a stipulation essential to the main purpose of the contract. A
breach of the condition gives rise to a right to treat the contract as repudiated
[Section12(2)].
In conclusion, according to the Act, if any conditions are not complied with, the
contract is void but if a warranty is not complied with, the other party is only
entitled to a claim for damages. However, a contract does not usually state clearly
if a stipulation made in the contract is a condition or a warranty. Whether a term
is a condition or a warranty depends on the construction and intepretation of the
particular contract of sale. A stipulation which was meant to be only a warranty
may be deemed a condition or otherwise.
The general rule: A breach of condition gives rise to a right to the innocent party
to treat the contract as repudiated. However, if the following five situations
arise as exceptions to the general rule, it gives only a right to claim for damages
(Section 13 of the SGA 1957).
(a) The buyer waives the condition;
(b) The buyer elects to treat the breach of the condition as a breach of warranty
and claim for damages only;
(c) The contract of sale is not severable and buyer has accepted the goods or
parts of the goods;
(d) The breach of the condition can only be treated as a breach of warranty unless
stipulated otherwise in the contract; and
(e) The contract of sale is for specific goods, and the property of the goods has
passed to the buyer, a breach of the condition should be presumed as a breach
of warranty except if the contract stipulates otherwise.
Provision
Section 11 of the SGA 1957 provides unless a different intention appears from
the terms of the contract, stipulations as to time of payment are not deemed to
be of essence of a contract of sale.
Example: If a buyer fails to pay within the stipulated time, a seller cannot repudiate
the contract made between them. However, most contracts of sales stress on time
and stipulate it expressively in the contracts. Time is, therefore, presumed to be of
essence to the contract.
There would be express stipulations made and agreed by the contracting parties
in a contract of sales. However, the SGA also provides several implied terms to be
impressed on the parties during their sale and purchase transactions, unless they
have included or modified the terms in the said contract of sales.
The implied terms are stated in Section 14 to Section 17 of the SGA 1957. Refer to
Figure 6.1.
General Rule:
The seller must have a valid right over the goods at the time he transferred
them to the buyer to enable the buyer to receive the title and enjoyment of
the goods.
In Rowland v. Divall (1923), Rowland bought a car from Divall and used it
for a few months. He later found out that Divall was not the valid owner of
the car as the real owner now claimed it from Rowland. Rowland sued to
recover the total purchase price he had paid to Divall. The court held that
Rowland was entitled to recover it in full, notwithstanding that he had used
the car for a few months.
General Rule:
When a seller transfers possession of the goods to a buyer, there is an implied
warranty according to Section 14(b) of the SGA 1957 that the buyer shall have
and enjoy quiet possession of the goods.
In Healing (Sales) Pty Ltd v. Inglis Electric Pty Ltd (1968), the court laid the
principle that a seller who has not been paid the full purchase price or partly
paid may not interfere with the goods sold.
General Rule:
Any goods to be transferred to a buyer shall be with an implied warranty
that it is free from any charge or other encumbrance and it was not known
by the buyer.
Example: Rahmat agreed to buy a house from Abdullah. Rahmat only knew
that the house was charged to the bank after the sales and purchase
transaction was made. Abdullah is liable for a breach of the implied warranty
for selling a house which is not free from encumbrance.
However, if Rahmat knew of that fact and still agreed to buy the house, there
is no breach of implied warranty.
Section 15 of the SGA 1957 provides that where there is a contract for the
sale of goods by description there is an implied condition that the goods
shall correspond with the description: and if the sale is by sample as well
as by description, it is not sufficient that the bulk of the goods corresponds
with the sample if the goods do not also correspond with the description.
A sale of goods by description normally takes place when a buyer does not
have sight of the goods but agrees to buy after relying on the description of
the goods for example, from catalogues.
(i) There is no implied term that the goods sold fit the particular purpose
it was bought except if:
• The buyer purchases goods that is usually sold by the seller in the
course of his business.
In Deutz Far East (Pte) Ltd v. Pacific Navigation Co. Ltd (1990), a
plaintiff is a manufacturer and supplier of ship engine and space parts.
They sued for payment for parts supplied to the defendantÊs ship. The
defendant claimed that the part supplied was defective and caused
great damage to the engine of his ship. The defendant also claimed that
the parts supplied did not fit the engine of their ship and were of
unmerchantable quality.
The court held that the defendant had relied on the plaintiff to supply
parts which could be used for the engine of their ship and the goods
supplied should be of merchantable quality.
However, if the goods sold was for one purpose only, for example,
when buying toothpaste for brushing teeth, the buyer therefore need
not inform the specific purpose of the purchase, unless the said goods
was purchased for other special purposes.
The court decided that the catapult was not of merchantable quality. The
shopkeeper could recover from the wholesaler. It was held that reasonable
examination was made by the seller but the defect of the goods could not be
discovered by reasonable examination. Therefore, the seller could recover
from the wholesaler.
SELF-CHECK 6.2
EXERCISE 6.1
Section 27 of the SGA 1957 (clearly similar to the maxim of nemo dat) provides:
Subject to this Act, and of any other law for the time being in force, where goods
are sold by a person who is not the owner thereof, and who does not sell them
under the authority or with the consent of the owner, the buyer acquires no
better title to the goods that the seller had, unless the owner of the goods is by
his conduct precluded from denying the sellerÊs authority to sell⁄
Example: A drug addict stole a pair of shoes and sold them to you. Even if you do
not know that the shoes were stolen goods, you do not have the right over them.
If the real owner claims them, you have to give him back the shoes. The purpose
of this principle is to protect the interest of the owner of goods sold without his
consent or stolen from him.
In Lim Chui Lai v. Zeno Ltd. (1964), Ahmad, a contractor, obtained a contract to
build sewerage from the Petaling Jaya Local Authority and made an agreement
with Zeno Ltd, to supply the materials needed for sewerage works. Zeno Ltd
supplied the said materials to the building site. Several problems arose which
caused the contract between Petaling Jaya Local Authority and Ahmad to be
nullified. Ahmad was later found to have sold the materials supplied by Zeno Ltd
to Lim Chui Lai. Zeno Ltd alleged that the materials were theirs, and Ahmad had
no authority to sell them to other persons. The court held that Ahmad was just a
bailee and not the possessor who has the right to sell the said goods to a third
party.
However, there are exceptions to the nemo dat principle. The exceptions are as
stated in Figure 6.2.
6.4.1 Estoppel
The first exception to the nemo dat principle is stated in Section 27 of the SGA 1957,
which is:
Subject to this Act, and any other law for the time being in force, where goods are
sold by a person who is not the owner thereof, and who does not sell them under
the authority or with the consent of the owner, the buyer acquires no better title
to the goods that the seller had, unless the owner of the goods is by his conduct
precluded from denying the sellerÊs authority to sell.
If the owner by his conduct, appeared as though he consented to the sale made by
the seller to a third party, the owner is precluded from denying that the seller has
no authority to do so.
Example: Ali wished to sell JamalÊs cassette to Hamid. Jamal was aware of AliÊs
conduct, but did not do anything to stop it. Therefore, it appears as though Jamal
had given Ali an authority to sell it. Jamal is precluded from making any claims
on Hamid.
In Syarikat Batu Sinar Sdn Bhd & YL v. UMBC Finance Bhd & YL (1990), the second
plaintiff (Supreme Leasing) purchased a tractor from a seller and leased it to the first
plaintiff (Syarikat Batu Sinar). The first defendant (UMBC) had previously bought
the same tractor from the seller and leased it to the second defendant. However, at
the time UMBC purchased it, the registration card to the tractor was in the sellerÊs
possession and no certification was made in the card to show that the tractor then
belonged to UMBC. The issue was on who was entitled to the tractor.
The court held that the failure by UMBC to take steps to make the certification in
the registration card precluded it from denying Supreme Leasing of its title to the
tractor.
Provided that where a mercantile agent is, with the consent of the owner, in
possession of the goods or of a document of title to the goods, any sale made by
him when acting in the ordinary course of business of a mercantile agent shall
be as valid as if he were expressly authorised by the owner of the goods to make
the same; provided that the buyer acts in good faith and has not at the time of
the contract of sale, notice that the seller has no authority to sell.
There are five conditions to be complied with under Section 27 under this
exception:
(a) The seller is a mercantile agent according to the Act. Section 2 of the SGA
1957 defines a mercantile agent as one having in the customary course of
business, as such agent authority either to sell goods, or to consign goods for
the purposes of sale, or to buy goods, or to raise money on the security of the
goods;
(b) Has posession of the good or document of title at the time of the sale;
(c) The keeping of the goods or document of title is with the ownerÊs consent;
(d) The sale was in the ordinary course of business of a mercantile agent; and
(e) The buyer bought them in good faith and has not notice that the mercantile
agent has no authority to sell.
In Folkes v. King (1923), Folkes owned a car and delivered it to a mercantile agent
for sale. The mercantile agent sold it to King and disappeared with the money he
received from King. The court held that King bought the car in good faith and the
mercantile agent sold it with FolkesÊs consent. King therefore had a good title to
the car.
Section 28 of the SGA 1957 provides that if one of several joint owners of goods
has the sole possession of them by permission of the co-owners, the property in
the goods is transferred to any person who buys them of such joint owner in
good faith and has not at the time of the contract of sale notice that the seller has
no authority to sell.
A buyer who buys goods which are jointly-owned by several persons has the right
over the goods bought if the buyer complies with these conditions:
(a) The goods bought were in the sellerÊs posession.
(b) The buyer bought them in good faith and has no notice at the time of the
contract that the seller has no authority to sell.
If the buyer was able to comply with these conditions, any other joint-owner could
not sue for the recovery of those goods from the buyer.
Section 29 of the SGA 1957 provides „where the seller of goods has obtained
possession thereof under a contract voidable under Section 19 or section 20 of
the Contracts Act 1950, but the contract has not been rescinded at the time of the
sale, the buyer acquires a good title to the goods provided he buy them in good
faith and without notice of the sellerÊs defect of title.
Section 29 of SGA 1957 clearly provides that any goods obtained by the seller from
the original owner by coercion, fraud, misrepresentation or under influence, and
the seller sold them to a buyer who bought in good faith without notice of the real
situation, the original owner of the goods cannot claim for recovery of the said
goods.
Example: Kamil bought a watch from Daud by fraud. Kamil later on sold it to
Salmah. The contract between Kamil and Daud was voidable at DaudÊs option. If
Daud did not rescind the contract before Kamil sold it to Salmah, Salmah then has
a valid right over the watch.
In Car and Universal Finance & Co Ltd v. Caldwell (1965), Caldwell, the owner of a
Jaguar car, was persuaded to sell and deliver a car to a rogue, who gave Caldwell a
car of a much lower value and a cheque which Caldwell later found to be worthless.
Caldwell reported to the police and asked the Automobile Association to recover his
car. They found that the car had passed through several hands and eventually was
acquired by the Car and Universal Finance Co. Ltd.
The court held that even though the Car and Universal Finance purchased the car
in good faith without notice of the real situation, since Caldwell had acted speedily
in rescinding the contract with A, the rogue, Caldwell was still entitled to the car.
Provision
Section 30 (1) of the SGA 1957 provides when a seller having sold goods to a
buyer continues to be in possession of the goods, the transfer by that seller of
goods to a new buyer who receives the same goods in good faith and without
notice of the previous sale shall have the same effect as if the seller making the
delivery or transfer was expressly authorised by the owner (the first buyer) to
transfer them to the new buyer.
In Pacific Motor Auction Pty Ltd v. Motor Credits (Hire Finance) Ltd (1965), the
plaintiff put several of his cars at a car dealerÊs shop and made an agreement for
the sale of the cars. Problems arose between them and the plaintiff rescinded his
agreement with the car dealer but he left them there. The car dealer then sold the
said cars to the defendant without his consent. The Privy Council held that the
defendant was entitled to the cars he bought.
Where a person having bought or agreed to buy goods, obtains, with the consent
of the seller, possession of the goods or the document of title, 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, pledge, or other disposition thereof to any
person receiving the same in good faith and without notice of any lien or other
right of the original seller in respect of the goods shall have effects as if such lien
or right did not exist.
There are four conditions to comply with in Section 30(2) of the SGA 1957 before
the exceptions are applicable:
(a) Buyer bought or agrees to buy the goods;
(b) The goods is in the buyerÊs possession with the sellerÊs consent;
(c) The same goods sold by the buyer or his agent to a third party or a new buyer;
and
(d) The third party or new buyer bought them in good faith.
In Newtons of Wembley Ltd v. Williams, A bought a car from the plaintiff and
paid by cheque. The cheque was found to be worthless. The plaintiff found out
that A sold the same car to B. B then sold it to the defendant. The court held that
since the car was in AÊs possession with the plaintiffÊs consent even though the
cheque was worthless and the car was already transferred to the defendant, the
defendant therefore had a valid right over the car.
ACTIVITY 6.1
Read the situations below. Give your opinion and identify the exceptions
for each situation.
EXERCISE 6.2
2. State six exceptions to the rule of nemo dat quad non habet.
6.5.1 Delivery
Section 33 of the SGA provides that delivery may be made according to the manner
agreed by all the parties involved in the contract of sale. Delivery is then presumed
done or has the effect of putting the goods in the possession of the buyer.
Section 32, on the other hand, specifically states that delivery of goods and
payment of the price are concurrent conditions which the seller and the buyer must
comply. A seller is presumed ready and willing to give possession of the goods to
the buyer in exchange for the price and the buyer should be ready and willing to
pay the price in exchange for possession of the goods.
Provision
Section 36(1) provides that „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, express or implied, between the parties⁄‰
„Apart from any such contract, goods sold are to be delivered at a place at which
they are at the time of the sale, and goods agreed to be sold are to be delivered at
a place at which they are at the time of the agreement to sell, or, if not then in
existence, at the place at which they are manufactured or produced‰.
The above provision states three places where delivery can be made:
(a) If the goods were at the place where the sale was made, delivery must be
made at that place;
(b) If the goods are at a different place, the said goods must be delivered at the
place at which they are at the time of the agreement to sell; and
(c) If the goods does not exist yet, the goods must be delivered at the place which
they are manufactured or produced.
However, if time of delivery is not fixed in the contract of sale, the seller is bound
to deliver the goods within a reasonable time [Section 36(2)].
If the goods delivered is lesser than the agreed quantity in a contract, the buyer is
entitled to reject them. However, if the buyer accepts, he, must then pay according
to the agreed price in the contract.
If the quantity delivered is larger than agreed in a contract, the buyer can reject the
balance. However, if he agrees to accept them, the buyer must pay for them at the
agreed rate.
If the seller delivers goods he is contracted to sell mixed with goods of a different
description not included in the contract, the buyer is entitled to accept only the
goods which are in accordance with the contract and reject the rest, or may reject
the whole delivery.
Section 37 provides that wrong delivery is subject to any usage of trade, special
agreement or course of dealing between the parties.
6.5.6 Risks
If a seller is required to deliver goods by a carrier to the buyer, the delivery of
goods by the seller to the carrier is prima facie deemed as the delivery of goods to
the buyer. If there is no agreement made between the seller and the carrier, and
the goods sent are lost or damaged in course of transit, the buyer is entitled to
decline the goods delivered by the carrier.
In certain circumstances where the goods are sent by the seller to the buyer by a
route involving sea transit, the seller must give such notice to the buyer to enable
him to insure the goods during the sea transit; if the seller fails to inform the buyer,
the goods are deemed to be at the sellerÊs risk if they are lost or damaged during
such sea transit. Delivery by carrier is stated in Section 39 of the SGA 1957.
Section 40 on the other hand states that when there is an agreement that goods
should be delivered at a place other than where they are, the buyer shall take any
risk of deterioration in the goods necessary in the course of transit.
6.5.7 Acceptance
Section 41 of the SGA 1957 gives a right to the buyer to examine the goods before
making an acceptance of goods delivered. The seller, on the other hand, must give
the buyer a reasonable opportunity to ascertain whether the goods are in
conformity with the contract or not.
In M. G. Seth & Ors v. Lam Tye Co Ltd (1954), the appellant and respondent made
a contract of sales of tiles from India. It was a c.i.f contract (cost, insurance, freight)
and a sale by description. The tiles sent by the seller unfortunately did not conform
to the buyerÊs description. The respondent made a written complaint. The tiles
were however sent to Butterworth and Alor Setar to be delivered to the
respondent.
The court held that the respondentÊs act of permitting the goods to be unloaded at
Butterworth and Alor Setar showed that an acceptance was made and the
respondent therefore was prevented from rejecting the goods.
EXERCISE 6.3
The unpaid sellerÊs right is provided in Section 46(1) of the SGA 1957. It states that
even if the property in the goods may have passed to the buyer, an unpaid seller
is, by implication of law, entitled to:
(a) A lien on the goods for the price while he is in possession of them;
(b) In cases of insolvency of the buyer after the transfer of the goods, the seller
has the right to stop the goods in transit; and
(c) A right of resale.
6.6.1 Lien
Lien is a right of the seller to retain possession of the goods until payment is made.
It can be exercised under these circumstances:
(a) Where the goods was sold without any stipulation as to credit;
(b) Where the goods was sold on credit, but the term of credit has expired; and
(c) Where the buyer becomes insolvent.
If part delivery of the goods has been made, Section 48 of the SGA 1957 provides
that an unpaid seller may exercise his right to a lien on the remainder. However,
he loses the right to a lien if:
(a) The seller 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;
(b) When the buyer lawfully obtains possession of the goods; and
(c) The seller waives the right to a lien.
Two crucial elements in this Section are that the buyer is insolvent and the goods
are in transmission.
(e) The carrier wrongfully refuses to deliver the goods to the buyer; and
(f) In cases where part delivery of goods has been made to the buyer, the right
to stop the goods in transit can be made on the remainder of the goods except
if there is an agreement made to give up possession of the whole of the goods.
Stoppage of goods in transit can be done according to Section 52 of the SGA 1957.
It is provided that the seller has the right of either taking actual possession of the
goods or giving notice of his claim to the carrier. Such notice may be given either
to the person in actual possession of the goods or to his principal. If the notice was
given to the principal, the principal must be given reasonably enough time and
opportunity to communicate to his agent.
6.6.3 Resale
Section 54 of SGA 1957 provides that a resale may be made when:
(a) The goods are of a perishable nature;
(b) After the unpaid seller gives notice to the buyer, the buyer does not within a
reasonable time pay for the goods; and
(c) The seller expressly reserves a right of resale if the buyer defaulted.
SELF-CHECK 6.3
What rights may a seller sue for if the goods he sold were not paid for?
If one of the parties to a contract of sale defaulted or breached the contract, the
other party is entitled to make a claim.
ACTIVITY 6.2
With all that you have understood now and referring to all the relevant
sections, write a short essay on the remedies a seller may claim for
breach of contract.
EXERCISE 6.4
Which is NOT the right given to unpaid seller according to the Sale of
Goods Act 1957?
A. Right of lien
B. Right of resale
C. Right to bring a tort action
D. Right for stoppage in transit
• There are three main elements in a contract of sale of goods, namely, there must
be goods available, the seller transfers or agrees to transfer the property in
goods and there is a price.
• Generally, every movable thing are goods except money and actionable claims
for debts or others.
• Price is usually meant in the form of money. The price can be fixed either
specifically by the contract or in a manner agreed by the contract or by the
course of dealing between the parties. If price is not fixed, the buyer shall pay
the seller a reasonable price.
• The term of contract of sale of goods can be classified into condition and
warranty. Whether or not the term in the contract is actually a condition or a
warranty depends on the the construction and intepretation of the particular
contract of sale.
• As a general rule, a person who has no right on the goods or without the
ownerÊs or possessorÊs permission, cannot transfer the goods to the buyer. This
is known as nemo dat quod non habet which is set out in Section 27 SGA.
However there are several exceptions to this rule. The exceptions are:
− Estoppel;
• There are three rights of an unpaid seller against the goods. The rights are lien,
stoppage in transit and right to resale.
• In the case of breach, either by seller or buyer, the party not in default may
claim for remedies.
Breach Sale
Estoppel Title
Goods Transit
Lien
INTRODUCTION
After having identified and studied the laws which govern the sale of goods, this
topic will discuss in depth the laws which govern hire-purchase activities. The law
applicable for hire-purchase activities is the Hire-Purchase Act 1967 (hereinafter
stated as HPA). It is applicable to all types of hire purchase in respect of goods
listed in the First Schedule of HPA, that is:
(a) All consumer goods (S. 2(1) – Consumer goods means goods purchased for
personal, family or house hold purposes).
In this topic, you will also learn the definition of hire purchase, principles for the
formation of a hire-purchase agreement, implied terms in the agreement, the
ownerÊs and the dealerÊs liabilities for misrepresentation, the rights as well as
liabilities of the hirer, the procedures for taking possession by the owner and the
hirerÊs right if goods were repossessed.
(a) In respect of goods where the property in the goods passed at the time of the
contract or upon delivery or at any time before goods delivered; and
(b) Where the buyer or hirer of the goods is a person who deals in the normal
course of a trade or business of selling similar goods having the same
description with the goods under the agreement.
Definition
Based on the definition, there are two important elements that you must
understand. First, hire purchase is a choice to buy goods after hiring it for a
certain period of time. Second, there is an agreement made between the owner
and the hirer that the goods is bought by instalments and the title to the goods
will not pass to the hirer until he has finished paying the full price of the goods.
In Tractors Malaysia Bhd v. Kumpulan Pembinaan Malaysia Sdn Bhd (1979), the
respondent sued for damages when the appellant repossessed his goods. The
respondent alleged that the business transaction was a mere sale and not a hire
purchase. The court held that, based on the agreement, both parties to the contract
had agreed to transfer the possession of the goods after the full price was paid by
the respondent. Therefore, the transaction was a hire-purchase agreement.
Besides the above three provisions, there are other two important provisions
relating to booking fees and downpayment which should be highlighted
here. Under Section 30A of the HPA, the owner, dealer or his agent shall not
collect or accept booking fees from the intending hirer. The payment of
booking fees can only be paid once the Second Schedule is served. The
amount of the booking fee shall not exceed 1 per cent of the cash price of the
good comprised in hire-purchase agreement. If the booking is cancelled or
withdrawn, 90 per cent of the booking fees shall be refunded.
Furthermore, Section 31 (1A) of the HPA provides that, the hirer needs to pay
the full downpayment only when the hire-purchase agreement is signed and
if the owner fails to deliver the goods to the hirer, then the downpayment
must be refunded in full to the hirer (S.31(1B)).
Any person who contravenes these particular procedures and formalities shall be
guilty of an offence and will be subjected to the following penalty as stated under
Section 46(1) of the HPA:
(a) Penalty imposed to the body corporate for example bank, finance company
or dealers:
(i) For the first offence – Fine not exceeding RM100,000.
(ii) For second offence and so forth – Fine not exceeding RM250,000.
(b) Penalty imposed to a person who is not a body corporate, for example
director, manager, sale advisor, officer of banks and dealers:
(i) For first offence – Fine not exceeding RM25,000 or imprisonment for a
term not exceeding three years or both.
(ii) For second offence and so forth – Fine not exceeding RM50,000 or
imprisonment for a term not exceeding five years or both.
SELF-CHECK 7.1
EXERCISE 7.1
1. Several stages need to be complied with before the formation of a
hire-purchase agreement. Explain those stages and the relevant
provisions.
In Jones v. Lavington (1903), quiet possession was decided to mean that there
should not be any interference from the seller or by any other individuals
through the seller on the goods under agreement.
In Ahmad Ismail v. Malayan Motor Co. & Ors (1973), a car on hire purchase
was detained by the police on suspicion that it was stolen. However, the car
was released because there was no evidence that it was a stolen good. The
court held that because the car was not a stolen good, the owner thereof had
the right to sell it.
(c) Goods Free from Any Charge or Encumbrances : Section 7(1)(c) of HPA
There is an implied warranty that goods shall be free from any charges or
encumbrances in favour of any third party at the time when the property is
to pass to the hirer.
Steinke v. Edwards (1935) showed that a hirer can sue if the owner fails to
ascertain whether goods for hire-purchase is free from any charges or
encumbrance. In this case, the plaintiff gave a sum of money to the defendant
for the settlement of a tax imposed on the car. The defendant however failed
to do so. Therefore, the plaintiff can make a claim on the defendant.
(i) When the hirer has examined the goods or a sample, in regards to any
defects which that examination ought to have revealed.
(ii) If such goods are second-hand goods and the agreement contains
statements which stated that:
• The said goods are second-hand goods.
• All conditions and warranties as to the quality and fitness are
expressed negatively, and the owner proves that the hirer has
acknowledged in writing that the statement was brought to his
notice.
In Lau Hee Teah v. Hargill Engineering Sdn Bhd & Ors (1980), a
hirer inspected a machine during negotiations but its defect was not
visible. The hirer then bought it by hire purchase. The court held
that the inspection made was not enough to reveal the defect with
the engine. The owner therefore could not deny that the machine
was of merchantable quality.
• The goods are second-hand goods and was so informed but there
was no mention of quality.
In Traders Finance Corp Ltd v. Rourke & Others (1967), the court
held that even though the parties knew that the goods were second-
hand, they still needed to clearly state it in the agreement and show
that the goods was not of quality.
EXERCISE 7.2
1. What is meant by quiet possession? Give one case to support it.
2. State two situations where the goods sold by hire purchase are not
of quality.
3. Give one relevant case with an implied condition that goods must
be free from any charges or encumbrances.
(a) Against the owner who made the representation, warranty or statement; and
(b) Against the person who made the representation, warranty or statement or
on whose behalf the person who made the representation, warranty or
statement was acting in making any payment in respect of the agreements
which is not sufficient to discharge the total amount then due under all the
agreements, to require the owner to appropriate the sum so paid by him in
or towards the satisfaction of the sum due under any one of the agreements,
or in or towards the satisfaction of the sum due under any two or more of the
agreements in such proportions as he thinks fit. If he fails to make any such
appropriation as aforesaid, the payment shall by virtue of this section be
appropriated towards the satisfaction of the sums due under the respective
hire-purchase agreements in the order in which the agreements were entered
into. This includes the right to sue for damages if the hirer bought the goods
from the person or his agent, whichever is relevant.
In Lau Hee Teah v. Hargill Engineering Sdn Bhd & Ors (1980), the Federal
Court was of the opinion that if the first defendant (agent) made a
misrepresentation which caused the plaintiff to sign the agreement, the
plaintiff is entitled to rescind the agreement with the second defendant
(owner) and sue for damages from the first defendant (agent). However, in
this case, the statement made by the agent was not a misrepresentation and
the hirer therefore could not terminate the agreement.
To further strengthen the protection given to the buyer, Section 8(2) of HPA
provides that the agreement made may not exclude, limit or modify the
hirerÊs right of action arising out of any such misrepresentation. An
agreement to the contrary shall be void.
SELF-CHECK 7.2
However, if the owner had supplied these statements within the previous
three months, the owner no longer needs to supply the same statement
within the stipulated 14 days.
If the owner fails to comply with the provisions of Section 9, the owner cannot
enforce the agreement against the hirer, sue for recovery of the goods or
enforce the guarantee in respect of the said agreement. However, this does
not mean that the agreement is void. In such situation, only the ownerÊs right
to enforce the agreement is temporarily suspended until the owner supplies
such statements.
It becomes an offence if the owner however within a period of one year still
continuously fails to forward the statement to the hirer. If proven guilty, he
could be fined for not more than RM1,000.
If a hirer purchased two or more goods by hire purchase from the same
owner, he is entitled to request payment for such goods to be distributed
according to his ability.
Section be appropriated towards the satisfaction of the sums due under the
respective hire-purchase agreements in the order in which the agreements
were entered into.
If we refer to the above provision, the hirer may assign his right, title and
interest without the consent of the owner, provided that the owner
unreasonably withholds the consent. However, in order to do so the hirer
must first apply to the High Court for an order declaring that the consent of
the owner has unreasonably been withheld.
(i) The owner fails or refuses to give his consent without sufficient reason.
(ii) The owner requires any payment or consideration for his consent to
such an assignment as provided under Section 12(2) of the HPA.
(iii) The High Court is satisfied to declare that the owner has unreasonably
withhold his consent, upon the application by the hirer under Section
12(3) of the HPA.
Section 15(2) of the HPA also provides that an agreement may be terminated
when the hirer requests the owner to sell the goods to a person introduced
by the hirer and the goods are bought in cash. If the value of the goods is
larger than the amount of unpaid payments, the hirer is entitled to the
balance but if the amount paid is lesser than the value of the goods, the owner
is only entitled to sue for debts from the hirer due to the difference.
EXERCISE 7.3
In Phang Brothers Motors Sdn Bhd v. Lee Aik Seng (1978), the court held that
because the Fourth Schedule notice was less than two days from the specified
period, the notice therefore was not valid and the repossession cannot be carried
out.
However in United Manufacturers Sdn Bhd v. Sulaiman bin Ahmad and Others
(1989), the court held that Section 16(1) only provided for the minimum period,
that is, 21 days. An action to repossess brought two years after the notice was
served, however, may still be presumed valid.
It should be noted that by virtue of section 16 (1A) of the HPA if the hirer defaulted
two successive instalments and the total payment of instalments is more than 75
per cent of the total cash price of the goods, the owner may not repossess unless he
has obtained an order from the court.
There are also cases where a hirer died. Section 16(1C) of the HPA stipulates that
an action for repossession can only be carried out if there is a default of four
payments successively.
As stated in Section 16(1) of the HPA, it is crucial to give notice before the act of
repossession can be carried out. However, Section 16(2) of HPA provides an
exception to the need for an owner to serve notice to the hirer, that is if there is a
reasonable ground for believing that the goods will be removed or concealed in
another location if a notice is served.
After the procedures according to Section 16(1) of the HPA are complied with, the
owner needs to comply with the following procedures also, which are:
(a) Section 16(3) of the HPA – within 21 days after repossession, the owner must
serve on the hirer and every guarantor of the hirer, a notice in writing as in
the form set out in the Fifth Schedule of HPA.
(b) Section 16(5) of the HPA – to prepare a document acknowledging receipt of
the goods, which sets out a short description of the goods and the date on
which, the time at which and the place where the owner repossessed the
goods.
For the Fourth and the Fifth Schedule mentioned in Section 16 of HPA, reference
can be made to the Fourth and Fifth Schedule in the Hire-Purchase Act 1967.
However, if a hirer feels that he cannot afford to settle the amount due but remains
unpaid after being served with the Fourth Schedule notice, the hirer is entitled to
return the goods within 21 days. Under this situation, the costs for repossession
and other costs will not be imposed on the hirer. This is explained in Section 16A
of the HPA.
After repossession, the owner cannot dispose of the goods without taking these
procedures in accordance with Section 17(1);
(a) To obtain written permission from the hirer, except;
(b) The period for the Fifth Schedule notice lapses; or
(c) The period for notice under Section 18(1)(a) lapses.
Failure to follow the procedures laid down in Section 16(1) will give the owner no
right to enforce repossession. If he still does it, his act is presumed to be unlawful.
In DPP v. Mohamad Nor (1988), when a hirer failed to settle the instalment
payment, the owner sent a few agents to take further action. However, the owner
failed to give the Fourth Schedule notice as stipulated by the Act. The hirer was
said to be holding a few weapons when the ownerÊs agent was carrying out
repossession. The court held that the ownerÊs action was unlawful and the hirer
was entitled to use reasonable force.
Section 16(6) of the HPA provides that the right of the owner ceased and
determined under the hire-purchase agreement if he failed to serve the Fifth
Schedule notice. However, if the hirer sued for recovery of the goods from the
owner, the agreement has the same force and effects as if the notice had been duly
given and therefore enforceable.
ACTIVITY 7.1
Based on what you have learned, draw a mind map of the owner
repossession procedures and post it on myINSPIRE online forum.
Section 18(1)(b) of the HPA – If there is a difference between the value of the goods
repossessed with the amount already paid, the hirer is entitled to the difference.
For more information on the laws, Acts and cases in Malaysia, refer to
http://lawyerment.com.my.
EXERCISE 7.4
• There are several procedures that have to be observed by the parties before,
during and after the formation of hire-purchase agreement. The procedures are
laid down under Sections 4 and 5 of the HPA.
• There are three implied conditions and two implied warranties provided under
the HPA. These implied terms will protect the interest of hirers and their
guarantors.
• There are seven statutory rights of hirer. The relevant provisions are provided
under Section 9 to 15 of the HPA. The rights are as follows:
− Right to have his right, title and interest transferred by operation of law;
• An owner has a right to take possession of the hired goods if the following
situations take place:
− The total payment of instalments paid by the hirer amounts to not more
than 75 per cent of the total cash price of the goods as in the hire-purchase
agreement.
− The owner served a notice in writing in the form set out in the Fourth
Schedule of the HPA; and
− The period fixed by the notice has expired which shall not be less than 21
days after the service of the notice.
• HPA imposes certain restrictions on the owner in the exercise of his right of
repossession. The restrictions are as follows:
− Owner must give notice to the hirer at least 21 days before the repossession
took place.
− After repossession, the owner must not sell or dispose of the goods for 21
days.
− The owner must observe the rights and immunities given to the hirer when
the goods are repossessed. For example, the hirer may require the owner to
sell the goods to any person introduced by him who is prepared to buy the
goods for cash.
INTRODUCTION
After discussing and identifying the laws which govern the contract of sales and
hire-purchase agreements, in this topic we will learn about insurance. Nearly
every day we are exposed to the importance of insurance, but how far do you
understand the laws which govern insurance?
The main legislation governing insurance law in Malaysia is the Financial Services
Act 2013 (hereinafter referred as FSA 2013), which repealed the Insurance Act
1996. However, by virtue of Section 275 of FSA, Section 144, Section 147(4), Section
147(5), Section 150, Section 151 and Section 224 of Insurance Act 1996 continue to
remain in full force and effect. Actually, Financial Services Act 2013 consolidated
the Banking and Financial Institutions Act 1989, Insurance Act 1996, Payment
Systems Act 2003 and Exchange Control Act 1953. The rules relating to insurance
can be found in Schedules 8, 9 and 10 of FSA. This Act came into force on 30 June
2013 except for Section 129 and Schedule 9 with effect from 1 January 2015.
The Insurance Act divides the insurance business into two, that are:
(a) Life insurance business – All businesses in respect of life policies.
(b) General insurance business – All businesses other than life insurance policies.
Section 16(1) of the FSA 2013 prohibits licensed insurers from carrying on both life
business and general business. The licensed insurer is given five years to comply
with this provision, unless a longer period is specified by the Minister, on the
recommendation of Bank Negara Malaysia, by a written notice to the insurers.
The usual types of insurance businesses carried out are life insurance, marine
shipping insurance, accident insurance, fire insurance, transportation insurance
and flight insurance.
You will learn about insurance contracts, subrogation, insurable interests, material
facts in an insurance contract as well as clauses in respect of basic clauses,
conditions, warranties and any exception clauses.
The court held that since the payment made by the deceased was the payment of
the first premium, therefore, there was an insurance contract.
8.2 SUBROGATION
The following is the definition of subrogation:
In Teo Kim Kien & Ors v. Lai Sen & Ors (1980) 2 MLJ 125, an insured sent his car
for a wash at a service centre (third party). The insured asked the car to be sent to
a certain address after the cleaning work was done and instructed that if the
insured was not there, to bring back the car to the service centre.
A service centre worker sent the car to the said address but because the insured
was not there, he brought it back to the service centre. On the way back, the car
rammed into a motorcyclist and the motorcyclist made a claim. After the insurance
company paid the claim to the motorcyclist, a claim for damages was made against
the service centre employer for his workerÊs negligence. It was held that the
insurance company was entitled to do so.
Example: A house owner has an insurable interest on his house because if his
house is burnt down, he would face losses.
Therefore, if a person who has no insurable interest insures on the subject matter,
the insurance policy is void. However, according to Section 3 of the Financial
Services Act 2013, there is an execption to this general principle in cases of life
insurance. A life insurance policy owner is said to have no insurable interest on his
life. The insurable interest is with:
(a) A spouse (husband or wife);
(b) Child or ward below 18 years old;
Copyright © Open University Malaysia (OUM)
234 TOPIC 8 INSURANCE
In Nanyang Insurance Co Ltd v. Salbiah & Ors (1967), at the time the sales took
place, the seller was still in possession of the goods. The court held that the seller
was the person who had the insurable interest. The other relevant case is Chong
Soo Sin c/o Syarikat Perniagaan Moden v. Industrial and Commercial Insurance
(M) Bhd (1992).
SELF-CHECK 8.1
In Goh Chooi Leng v. Public Life Assurance Co Ltd (1964), a beneficiary to the
insurance policy made a claim after the insuredÊs death. The insurer refused to
settle the payment on grounds that the insured in his admission had made a
fraudulent statement, a misrepresentation and concealed the truth. The insuredÊs
medical report showed that the insured used to receive treatment on tuberculosis,
but when answering a question regarding the said treatment, he denied it. The
court held that the answer in the policy form was false. The contract was therefore
void.
The insured however need not disclose all facts. Only material facts must be
disclosed. The following is the definition of material facts:
Material facts in the context of an insurance contract are facts which if known
by the insurer, could influence the judgment of the insurer in accepting or
rejecting the taking of the risks and in deciding what premium should be
fixed. If the insured disclosed non-material facts, the policy is still valid.
In New India Assurance Co. Ltd v. Pang Piang Chong & Ors (1971), a man died
due to a road accident and his next-of-kin sued for damages against the insured,
who drove the car. The insurer refused to settle the compensation money on the
ground that the insured did not forward true facts when completing the policy
form. In the policy form was the question, „Have you or any person you give
permission to drive, ever committed any driving offences within the last five
years.‰ The answer given was „No.‰ The insurer found out that the insured
committed five offences under the Road Traffic Ordinance 1958 for driving
without licence and for not displaying the „L‰ sign on his car.
The court held that the offence committed by the insured had no connection with
the original purpose the insurance was taken out by the insured. The answer was
not a non-disclosure of material facts or a deception of material facts.
Other relevant cases are Abu Bakar v. Oriental Fire & General Insurance Co Ltd
(1974), China Insurance Co Ltd v. Ngau Ah Kau (1972) and United Malayan
Insurance Co. Ltd. v. Lee Yoon Heng (1964).
(ii) The licensed insurer also shall clearly inform the insured in writing of
the consumerÊs pre-contractual duty of disclosure and that the duty of
disclosure shall continue until the time the contract is entered.
(iii) Besides that, Para 11 Schedule 9 of FSA 2013, requires the licensed
insurer not to make misleading statements, not to conceal a material
fact and not to use unauthorised sales brochures. If this happens the
insured may rescind the contract.
As a result of the above provisions, it seems that the licensed insurers must make
sure that they pose the right and specific questions in order to assess the risk of
insuring. Meanwhile, the insured must take reasonable care in answering the said
questions and avoid making any misrepresentations.
So, it is up to the insurer to prove that the insured knew about the above
matters.
The remedy depends on what the insurer would have done if the insured
had complied with the duty to take reasonable care.
(i) If the insurer would not have entered into the contract on any terms,
the insurer may avoid the policy and return the premium;
(ii) If the insurer would instead have suggested different terms relating to
the premium, the insurance contract will be treated as if it had been
entered into on those amended terms; or
(iii) If the insurer would have charged and increased premium, the insurer
may reduce proportionately the amount to be payable to the insured.
EXERCISE 8.1
1. Identify the differences between an insurance contract and other
contracts.
3. Give the definition of material facts in your own words and try to
differentiate your definition with answers given for the exercise.
In Dawsons v. Bonnin (1922), it was stated in the proposal form that the lorry
would be kept at 46, Cadogan Road, Glasgow, whereas in fact it was kept outside
Glasgow. Later, it was burnt down. The court held that the insured was not liable
because there was a misstatement by the insured.
Like other contracts, an insurance contract also contains conditions and warranties
that must be complied with. Breach of any conditions and warranties may cause
the insurance contract to be rescinded.
In Suhaimi bin Ibrahim v. United Malayan Insurance Co Ltd (1966), the plaintiff
took out a workersÊ compensation policy from the defendant. In the proposal form,
the plaintiff stated that six employees were covered by the said policy. In fact, the
plaintiff had 23 workers. One of the workers was killed while cutting down a tree.
The plaintiff gave a notice regarding the accident to the defendant.
The court held that because the plaintiff had more than six workers, there was a
breach of warranty. Also, there was a breach of condition when the plaintiff failed
to refer the dispute within 12 months to an arbitrator after the defendant refused
to make payments to him. The defendant therefore was not liable to the policy and
the claim was unsuccessful.
The court found that even though the insured gave notice with regard to the
accident, he however failed to give notice in respect of the prosecution. Therefore,
the plaintiff was not liable to the policy.
EXERCISE 8.2
1. What is said to be the basis of an insurance contract?
6. Give one case to support the differences between material facts and
non-material facts.
• The Act which governs the law relating to insurance in Malaysia is the
Financial Services Act 2013.
Insurance Insurer
Insurance contact Subrogation
Insured
INTRODUCTION
In this topic, you will learn and be exposed to negotiable instruments.
Definition
Negotiable instruments refer to types of documents used in commercial or
financial transactions.
Negotiable means something that can be transferred from one person (owner) to
another party in the form of a document which would prove the existence of
contractual duties in exchange of a payment.
Further on, you will learn about the concept behind the bills of exchange,
negotiation, acceptance, indorsement as well as bill delivery, liabilities of the
relevant parties in bills of exchange, the holderÊs rights, procedure for dishonoured
cheques, the definition and forms of cheques, crossing and alteration of cheques,
protection to paying and collecting banks and termination on the authority of the
bank to pay.
The person who gives the order to pay is called the drawer. The drawee, on the
other hand, is the person to whom the order to pay is given and the person to
whom payment is to be made is the payee.
Based on the definition given, there should be six important characteristics in a bill
of exchange.
In Palmer v. Pratt (1824) 2 Bing 185, the order to pay was made within
30 days after the ship reached Calcutta. The court held that it was conditional
because the ship might not arrive at Calcutta.
Provision
If a bill is not payable to the bearer, the drawee must be named or
otherwise indicated with reasonable certainty. If there is no drawee, the
bill is considered paid to the bearer.
Provision
Section 6(1) of the BEA: A drawee must be named or otherwise indicated
in a bill with reasonable certainty
In North and South Insurance Corp v. National Provincial Bank (1936), it was
decided that it was a bearer bill and did not need an indorsement
In other words, the provision showed that time for payment can be made
certain. If it is not specified, payment may be made on demand or when
presented.
The sum payable must be stated on the said bill and the sum must be
ascertained. In Barlow v. Broadhurst (1820), the written order was, „Pay 400
to JS agent, deduct any benefits or money owed by JS to the defendant‰. Here,
the sum to be paid was held by the court to be unascertained.
SELF-CHECK 9.1
By using your creativity, draw a mind map to show all the six important
characteristics which must exist on a bill of exchange as well as the
relevant cases and sections.
Definition
Section 31(1) of the BEA defines a negotiation of bill as „⁄when it is
transferred from one person to another in such a manner as to constitute
the transferee the holder of the bill.‰
This means that every bill of exchange may be transferred from one person
to another. The manner in which a title is transferred is called negotiation.
Examples can be seen in Section 31(2). If it is an order bill, it is negotiated by
indorsement by the holder and transferor [Section 31(3)].
(b) Acceptance
Definition
Acceptance is defined according to Section 17(1) of the Bills of Exchange
Act as „the signification by the drawee of his assent to the order of the
drawer‰.
(b) Indorsements
An indorsement affects the transfer of title in the bill to the transferee and also
involves the liabilities of the indorser. Indorsement is important in the
negotiation of order bills. Before an indorsement can be enforceable as
negotiation, the conditions set out in Section 32 of BEA must be complied with:
(i) It is written on the bill itself and signed by the indorser. A simple
signature without any additional words is sufficient. A written
indorsement on the allonge or a copy is presumed as written on the bill
itself;
(ii) It must be an indorsement of the entire bill; partial indorsement, where
there is a transfer of part of the sum payable only or there is a transfer of
a bill to two or more different persons, the indorsement is not
enforceable as negotiable bill;
(iii) If a bill is payable to two payees or indorsees, who are not partners, every
one of them must indorse except if one of them is authorised to make the
indorsement;
(iv) If a bill is payable to the order of a wrong payee, or his name is wrongly
spelt, he may indorse according to the spelling on the bill, adding if he
thinks fit, his proper signature;
(v) When there are two or more indorsements on a bill, each indorsement
would be presumed to have been made in accordance with the intention
of the bill, except if proven to the contrary; and
(vi) An indorsement may be made in a blank or special indorsement. It may
contains terms which make it restrictive.
Type of
Section Explanation
Indorsement
Blank S. 34(1) A blank indorsement is effected when no indorsee is
indorsement specified and the bill indorsed becomes payable to bearer.
Special S. 34(2) When payee states to whom, or on his order, the bill is
indorsement payable.
Section 21(1) of the BEA provides that a contract in a bill is incomplete and can be
rescinded if a drawer, drawee or acceptor or indorser did not sign and deliver the
bill. However, when acceptance is written on the bill, and the drawee has given
notice or when he agrees to obey the order of the person who is entitled to the bill
that he has accepted, acceptance is then completed and cannot be rescinded.
SELF-CHECK 9.2
EXERCISE 9.1
1. State two conditions which must be complied with for a valid
acceptance.
Provision
Section 55(1) of the BEA provides that drawer of a bill is liable to accept and will
be paid to its tenor on due presentment of the bill. If the bill be dishonoured, he
will compensate the holder and any indorser who is compelled to pay it,
provided that the requisite proceedings on dishonour be taken. He is precluded
from denying to a holder in due course the existence of the payee or his capacity
to indorse.
The drawer or acceptor is the person to whom the order to pay is given. He is liable
when he signs the bill as the acceptor or drawee. Section 54 of the BEA provides
that when he accepts the bill:
(a) He must pay it according to its tenor; and
(b) He is precluded from denying to a holder in due course.
Indorsers also cannot deny the existence of the drawee to the holder, the
authenticity of drawee's signature and all previous indorsements. An indorser
cannot also deny an immediate or a subsequent indorsee that the bill was at the
time of his indorsement a valid bill and that he had a good title.
SELF-CHECK 9.3
What are the liabilities of a drawee or acceptor when he signs a bill
addressed to him?
Definition
According to Section 2 of the BEA, a holder is defined as the payee, or indorsee
having possession of a bill or the bearer of a bill.
The rights of a holder are provided in Section 38 of the BEA. They are as follows:
(a) He may sue on the bill in his own name;
(b) He holds the bill free from any defect of title of any of the prior parties; and
(c) Where his title is defective.
9.5 PAYMENT
Payment must be made when a bill is presented. If a bill is not presented for
payment, the drawer and indorsers shall be discharged from liability (Section 45(1)
of the BEA). Presentment for payment must comply with the following rules
(Section 45(2) of the BEA):
(a) Where the bill is not payable on demand, presentment must be made on the
day it falls due.
(b) Where the bill is payable on demand, presentment must be made within a
reasonable time from date of issue to make the drawer liable, and within a
reasonable time from indorsement to make the indorser liable.
(e) Where a bill is presented at a proper place, and after the exercise of
reasonable dilligence, no person authorised to pay or refuse payment can be
found, no further presentment to the drawee or acceptor is required.
(f) Where a bill is drawn upon or accepted by two or more persons who are not
partners, and no place of payment is specified, presentment must be made to
all of them.
(g) Where the drawee or acceptor of a bill is dead, and no place of payment is
specified, presentment must be made to a personal representative; and
(h) Presentment may be made through the post office where agreement or usage
authorises that course.
SELF-CHECK 9.4
Definition
According to Section 2 of the BEA, a holder is defined as the payee, or indorsee
having possession of a bill or the bearer of a bill.
Section 47(1) of the BEA provides that a bill dishonoured by non-payment is a bill
that:
(a) When it is duly presented for payment and payment is refused or cannot be
obtained; and
(b) When presentment is excused and the bill is overdue and unpaid.
For a valid and effectual notice of dishonour, the principles in Section 49 of the
BEA must be complied with:
(a) When the notice is given by the indorser or holder who is himself liable on
the bill;
(b) Notice of dishonour may be given by an agent either in his name or in the
name of any party entitled to give notice;
(c) Where the notice is given by a holder, it is effective on subsequent holders
and all prior indorsers who have a right to receive the notice;
(d) Where the notice is given by or on behalf of an indorser entitled to give
notice, it is effective on the holder and subsequent indorsers;
(e) The notice may be given in writing or by personal communication, and in
any terms which sufficiently identifies the bill and intimate that the bill has
been dishonoured by non-acceptance or non-payment;
Prior parties are not liable if a notice of dishonour is not given within the specified
time. In Ismail v. Abdul Aziz (1955), the defendant accepted the supply of padi
from the plaintiff. The defendant indorsed two cheques in favour of the plaintiff
from his account. The plaintiff later indorsed the cheque in favour of the
government. The cheque was presented for payment on 14 September 1950 but
was dishonoured. The plaintiff received a notice of dishonour on 20 September but
only gave notice to the defendant on 18 October.
The court held that in order to make the notice valid and effective, it must be given
according to the rules stipulated in Section 49 of the Bills of Exchange Act 1949.
The plaintiff was negligent because he delayed in sending the notice of dishonour.
Definition
Under Section 73(1) of the BEA, a cheque is defined as „a bill of exchange,
drawn on a banker payable on demand‰. It means that the laws in respect of
bills of exchange payable on demand are also applicable on cheques.
To identify the various forms of cheques, refer to the following Table 9.2:
Form Explanation
Undated A bank is not bound to honour an undated cheque. However, the holder of
cheque such cheque is authorised by Section 20 to fill in the date, but must do so
within a reasonable time.
Overdue Section 36(3) provides that overdue cheques are cheques which have been in
or stale circulation for an unreasonable length of time. „Reasonable length of time‰
cheque is a subjective term and depends on certain cases. Generally, a cheque
becomes overdue or stale six months after it was issued.
Post-dated A post-dated cheque is a cheque with a future date inserted. It is in fact not
cheque a valid cheque because no payment can be made when presented. It is
however valid by virtue of Section 130 that „a bill is not invalid due to it
being pre-dated or post-dated, or with a date on a Sunday‰. The bank
therefore will honour the cheque as to the stated date.
(b) By drawing two parallel lines across it only with, or without, „Not
negotiable‰ written between the parallel lines.
The effect of a general crossing is that the paying banker can only pay the amount
of the cheque to a collecting banker. The banker cannot pay cash across the counter.
Special crossing is made by drawing two parallel lines across it with the addition
of the name of banker, with or without „not negotiable‰ written between the
parallel lines. The effect of special crossing is that the paying banker can only pay
the amount of the cheque only to a collecting banker named in the crossing. Thus,
the person who wants to obtain payment of the cheque must be a customer of the
said collecting banker.
For better understanding you may refer to the case of Wilson & Meeson v.
Pickering (1946), where in this case Wilson drew a cheque in blank and crossed
„not negotiable‰. His clerk, who was supposed to fill in the amount and the name
of the payee, inserted a sum in excess of her authority and delivered it to Pickering
for the payment of her personal debt. The issue here is whether Pickering had a
good title to the cheque. The court held that, since the clerk had no title to the
cheque, she was not capable of giving a better title to Pickering. Therefore, Wilson
was not liable on the cheque.
The words „account payee‰ is usually written on a cheque. Even though this kind
of crossing is not stated in the Act, it is however permitted and has become
common practice.
The words „account payee‰ on a cheque are a direction that the banker can credit
the cheque to the account of the payee only.
SELF-CHECK 9.5
„any alteration of the date, sum payable, time of payment, place of payment,
and where a bill has been accepted generally, the addition of a place of
payment without the acceptorÊs assent‰.
Section 64(1) of the BEA explains that „where a bill or acceptance is materially
altered without the assent of all parties liable on the bill, the bill is avoided except
as against a party who has himself made, authorised or assented to the alteration,
and subsequent indorsers provided that where the bill has been materially altered,
but the alteration is not apparent, and the bill is in the hands of a holder in due
course, such holder may avail himself of the bill as if it had not been altered and
may enforce payment of it according to its original tenor‰.
The above provision means if the alteration is apparent, all parties liable on the
cheque will be free from such liabilities. If otherwise, the holder of the cheque may
still enforce payment.
This is part of the contract between the bank and its customers, so that the
customers will take extra precaution when writing cheques to avoid forgery. Due
to a customer's negligence, a dishonest holder may make alterations on the cheque.
If the bank cannot detect any apparent alteration made, payment will be made to
the holder and it will be debited from the customer's account.
In London Joint Stock Bank v. Macmillan and Arthur (1918), one of the partners of
a firm signed a cheque payable to bearer, where the words „2 Os Od‰ were written
in the space for the figures. The clerk, entrusted by the firm on the duty of filling
up cheques for signature, then wrote in the space for writing „one hundred and
twenty‰ and altered the figures accordingly. The court held that the bank could
debit the amount from the account of the firm for the partner's negligence.
If the banker made a payment to the wrong person, the banker still has the right to
debit the amount from the customer's account. However, the banker must fulfil
the following provisions before it can be protected:
(a) Payment made in due course – Payment in due course is defined under
Section 59 of the BEA as „payment made at or after the maturity of the bill to
the holder in good faith and without notice that his title to the bill is
defective‰;
(b) The banker pays it in good faith and in the ordinary course of business
without knowledge such indorsement has been forged or made without
authority (Section 60 of the BEA);
(c) The banker pays it in good faith and in the ordinary course of business
without knowledge that the cheque was not indorsed where there is an
irregular indorsement (Section 82 of the BEA); and
(d) If when the cheque is crossed, the banker pays in good faith and without
negligence and in accordance with the crossing (Section 79(2) and Section 80).
The collecting banker will be liable to its customers if there is a breach of contract,
that is, failure to make collection as ordered by its customer. The banker who
wrongly collects for a customer who is not entitled to the money, is also liable to
the true owner.
Section 85 of the BEA gives protection to the banker which collects payment of
cheques for customers who has no title or has a defective title. The banker is not
liable to the true owner if:
SELF-CHECK 9.6
Compare the duties of the paying banker and the collecting banker.
State your answer in a table form.
EXERCISE 9.2
1. State four out of the ten conditions which enable the authority of
a bank to make payment be terminated.
• There are three forms of cheques: undated cheques, overdue cheques or stale
cheques and post-dated cheques.
• If a cheque has been materially altered without the drawerÊs consent, the
drawer will be discharged from liability. If the bank honours the cheque, the
bank cannot debit the amount from the drawer's account.
• It is part of the contract between the bank and its customers that the customers
will take extra precaution when writing cheques to avoid forgery.
• The paying bankerÊs duty is to pay the right person according to his customerÊs
mandate. So, if the paying banker pays the amount of the cheque to the wrong
person, the bank has breached its duty and must bear the loss. However, the
Bill of Exchange Act 1949 provides some protection for the paying bank. In
order to be protected the paying banker must fulfil certain conditions laid
down in Section 59, Section 60, Section 82(1), Section 79(2) and Section 80.
Banker Cheque
Bill delivery Indorsement
Bills of exchange Negotiable instruments
INTRODUCTION
You have learned about the law relating to commercial transaction according to
common law and Malaysian law in Topics 2 through 9. Now, you will learn the
laws relating to commercial transactions according to Syariah law.
In this topic, we will be studying the definition of contracts from the Syariah point
of view, the pillars of a valid contract, the doctrine of khiyar (option) and various
types of Syariah contracts which are commonly used in commercial transactions.
„O you who believe! Squander not your wealth among yourselves in worthless
dealings, but let there be trade by mutual consent...‰
Prophet SAW expressly stated that „Muslims are bound by their conditions...‰
(narrated by Al-Bukhari).
Technically, Muslim jurists are of the opinion that Âaqd has two meanings: general
and specific. For the general meaning, Âaqd is whatever a person has intent to do
or perform, either based on his own decision, for example, as in endowment
(waqaf) and remission of debt (ibraÊ), or requiring the consent of at least two
parties as in sale, hire and agency.
As for the specific meaning of Âaqd, it is a connection of the words of one party
(Âijab) to the words of the other parties (qabul) which constitute a legally binding
contract, enforceable by law.
AlaÊ Eddin Kharofa (2000) further explained that contracts according to Syariah
law is an expression of the matching between a positive proposal made by one of
the contractors and the acceptance of the other contractor in a way which has an
impact on the subject of the contract.
SELF-CHECK 10.1
The majority of Mazhabs namely the Maliki, Syafie and Hanbali are of the opinion
that there are three pillars or rukn to a contract:
(a) Statement of contract (Sighah);
(b) The contracting parties; and
(c) The subject matters of the contract.
However, the Hanafi jurists hold that there is only one condition of a contract
which is a statement of contract or sighah. However, all aspects will automatically
follow the statement. Figure 10.1 show us conditions or pillars of a contract, from
the Islamic perspective.
Sighah comprises of both offer (Âijab) and acceptance (qabul). Thus, the
contract is said to be concluded once there is an Âijab and qabul. In other
words, we can say that sighah is actually evidence showing that both of the
contracting parties have an intention to create legal relations between them.
Definition of ÂIjab
ÂIjab is the offer made by the first party to the contract (that is, the
offeror). ÂIjab here means confirmation because it gives and confirms the
freedom of acceptance to the second party (that is, the offeree).
Definition of Qabul
Qabul is an acceptance. When an offer is accepted by the offeree it is said
that an acceptance is made. When there is an effective acceptance, an
agreement is made between the parties which become legally binding.
We can conclude that, generally, the definition of Âijab and qabul under
Syariah law is similar to the definitions of offer and acceptance that we have
discussed earlier in Topic 2.
Muslim jurists have stipulated that there are three conditions for the validity
of offer and acceptance in a contract. The conditions are as illustrated in
Figure 10.2.
Muslim jurists have divided ahliyyah into two types, namely ahliyyah al-
wujub and ahliyyah al-adaÊ. Ahliyyah al-wujub refers to the capacity to
acquire rights only. Meanwhile, ahliyyah al-adaÊ refers to the capacity for the
performance of rights and discharge of obligations. It only exists once a
person acquires proper mental awareness and attains the age of puberty
(bulugh). Muslim jurists are of the opinion that in order to form a valid
contract, both contracting parties must possess ahliyyah al adaÊ kamilah
which means that the parties must fulfil the following attributes:
(i) Attain puberty (bulugh);
(ii) Be of sound mind; and
(iii) Matured (rushd).
Now let us look at Figure 10.3 that shows us attributes of the contracting
parties.
Besides that, it also should be highlighted here that the contracting parties
must enter into the contract with free consent (rida). A majority of jurists are
of the opinion that rida means intention of doing something without being
caused by coercion.
Muslim jurists have laid down four conditions in order for the subject matter
to become valid. The conditions are illustrated in Figure 10.4.
SELF-CHECK 10.2
1. What are the pillars of a contract in Syariah law?
2. Is there any similarities between sighah and the intention to create
legal relations?
3. What are the conditions of the contracting parties under Syariah
contract? Is it similar with the requirement of capacity under the
Contracts Act 1950?
There are various types of khiyar recognised by Syariah law. However, we will
only focus our discussion on the four famous khiyar in Syariah contract. Table 10.1
provides a simple explanation about the selected khiyar.
On the other hand, the bilateral contract requires consent of both parties to the
contract, in which one of the parties makes a proposal and the other accepts it.
Because of this, the bilateral contract is bound to strict rulings and guidelines
compared to the unilateral contract. The jurists divide the bilateral contract into
six classifications as shown in Figure 10.5. In order to have a better understanding
about the classification, you may refer to Table 10.2.
Classification of
Explanation Example
Bilateral contract
Contract of exchange It is a type of contract whereby an Contract of sale (bayÊ)
(muÊawadat) exchange contract takes place between
two contracting parties.
Contracts pertaining It governs the legal right to utilise of Contract of hire
to the utilisation of usufruct or benefit from property that (Ijarah)
usufruct (manfaÊah) belongs to another person.
There will be a brief discussion on selected examples for each classification. The
explanation will only be limited to the definition, legality, types, elements and
conditions of each contract.
ACTIVITY 10.1
(a) Definition
Now let us look at the definition of sale of goods according to Muslim jurists:
(b) Legality
The evidence of permissibility of contract of sale is derived from the Quranic
injunction, hadith of prophet (SAW) and ijmaÊ of jurists. Among others are:
(a) Definition
Now let us examine the definition of wakalah according to Muslim jurists:
Even though in this circumstance it seems that the principal has given
full authority to the agent to act on his behalf, it does not cover any
harmful things to the principal, such as a gift or divorce. Thereby, the
agent has no authority to divorce the principalÊs wife without express
authority from the principal.
(a) Definition
Now let us look at the definition of contract of hire according to Syariah law.
(b) Legality
The evidence of permissibility of ijarah is derived from the Quranic
injunction, hadith of prophet (SAW) and ijmaÊ of jurists. Among others:
(a) Definition
Now let us look at the definition of contract of partnership according to
Muslim jurists:
(b) Legality
The legality of contract of partnership can be found in the Quran, hadith and
ijmaÊ. Among others are:
Hadith Qudsi:
Allah SWT said: „I am a third of two partners as long as the partner does not
betray his companion. If one of the partners betrays the other, I cease to be
partner of them‰ (Narrated by Abu Daud and Al-Hakim).
You may refer to Figure 10.8 for the types of musharakah in detail:
Types of Partnership
Explanation
of Contract
Financial Partnership Two or more persons agree to participate in a capital
(sharekat amwal) to be used in trade and the profits would be divided
between them according to a specified ratio. This
type of partnership is subdivided into two types:
• Unequal share partnership (Âinan)
• Equal share partnership (mufawadah)
Partnership with eminent Two or more persons who have no capital to use in
people (wojuh) trade. But they have a good reputation in the society.
Both of them agree to enter into a partnership
whereby they will buy goods on credit and sell them
in cash. The profits derived from the trade will be
divided among them according to agreed conditions.
Partnership of Two professionals undertake to finish a job such as
professions (sharikah carpentry, sewing or dying. They agree to divide the
sanaÊi) hire between them according to certain conditions
which they agree upon.
Capital-labour It is partnership in profit where two or more persons
partnership join together to form a business whereby one side
(mudharabah) provides work in the business and the other side
provides capital. The two sides are partners in profit
and loss.
Essential
Conditions
Elements
Partners • Each partner should meet all the requirements of principal
(muwakkil) and agent (wakil). Please refer to Table 10.4.
Capital • Any asset valued in money
• Not in debt
• Specific amount
• From all partners except for mudharabah
• Paid into capital fund
Business or trade • Must be permissible according to Syariah law.
Profit/loss • According to proportion of shares or according to agreed
sharing ratio.
Contract: ÂIjab • All the conditions for sighah are applied.
and qabul
(a) Definition
(b) Legality
(a) Definition
(b) Legality
Surah An-Nisa: 58
„Verily, Allah commands that you should render back the trusts to those, to
whom they are due‰.
EXERCISE 10.1
1. What are the differences between contract of exchange (muawadat)
and contract of utilisation of usufruct (Âuqud al manfaÊah)?
2. Explain the types of wakalah.
3. Discuss the elements and conditions for a valid musharakah
contract.
4. Briefly discuss the different types of khiyar in the Syariah contracts.
• Contract or Âaqd is a connection of the words of one party (ijab) to the words
of the other parties (qabul) which constitute a legal binding contract and
enforceable by law.
• The contract in Syariah law consists of three pillars which are: the statement of
contract (sighah), the contracting parties and the subject matter of the contract.
• Muslim jurists have classified a contract based on its nature into two, unilateral
and bilateral. Bilateral contracts are further divided into six classifications as
follows:
Abdullah Alwi Hassan. (1992). Sales and contracts in early Islamic commercial
law. Islamabad, Pakistan: Islamic Research Institute, International Islamic
University.
Ahmad Hidayat Buang. (2000). Studies in Islamic law of contracts: The prohibition
of gharar. Kuala Lumpur, Malaysia: International Law Book Services.
Islamic banking practice from the practitionerÊs perspective (1994). Kuala Lumpur,
Malaysia: Bank Islam Malaysia Berhad.
Niazi, L. A. (1991). Islamic law of contract. Lahore, Pakistan: Research Cell, Dyal
Sing Trust Library.
11
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the meaning of partnership;
2. Discuss characteristics of business entities which are formed
through „partnership‰; and
3. Assess the rights and liabilities of partners and their relations to each
other and to a third party.
INTRODUCTION
Partnership is one of the various types of business organisations found in Malaysia
other than companies and sole proprietorships. Why does a person prefer to form
a partnership as a form of business? There should be advantages to those who wish
to carry on this form of business. Forming a partnership, for example, would
enable more capital to be injected as compared to carrying on a sole proprietorship
as a partnership would involve more than one person compared to only one
individual in sole proprietorship. The partners in a partnership will be jointly
liable while in a sole proprietorship the owner is individually liable.
Definition
Section 3(1) of the Partnership Act 1961 defines partnership as „the relation
which subsists between persons carrying on business in common with a view
of profit‰.
Provision
No association or partnership consisting of more than 20 persons shall be
formed for the purpose of carrying any business for profit, unless it is
incorporated as a company under this Act, or is formed under any other written
laws.
If we refer to the definition in Section 3(1) of the PA 1961, three elements must be
satisfied first before a business is or is not a partnership. We will discuss these
elements in Subtopics 11.1.1, 11.1.2 and 11.1.3.
This is clearly seen from the decision made by the court in Keith Spicer Ltd. v.
Mansell (970). It was held that there was no evidence from the facts of the case
which showed Mansell and Bishop were carrying on a business with a view of
profit. The evidence only showed that they were getting ready to carry on a
business which would later be formed into a company.
The Partnership Act 1961 does not stipulate the maximum number of members in
a partnership. However, there should be a minimum of two members. Reference
should be made to the Section 13 of the Companies Act 2016 to determine the
maximum number of members as shown in the following provisions:
„In the case of any other association or partnership, it consists of not more than
twenty members‰.
The above Sections states that a professional partnership may be made up of more
than 20 members but a maximum of 20 members for an ordinary partnership.
This issue was decided in several cases such as Tan Teck Hee v. Cheng Tian Peng
(1915). As a result, a partnership firm carrying on a business with more than 25
partners was not valid and no legal actions may be made against them. The same
principle was also applied in Shim Fatt v. Leila Road Bus Co. (1957).
Before a partnership or a person wishes to enter into any transactions with any
firms, they should therefore ascertain that such limitation is complied with. This is
to enable any contracts entered to be enforceable in court.
SELF-CHECK 11.1
Think of this scenario: There was a conflict of opinion between Michael,
Aida and Siva when every one of them disagreed to the kind of business
and partnership which they wish to form. List down its effects on their
partnership. Compare your answers with other friends in myINSPIRE.
In Soh Hood Beng v. Khoo Chye Neo, there was no partnership as there was no
intention to make any profits. Their only intention was to assist their needy fellow
members.
Section 4(c) of the PA 1961 provides that the receipt by a person of a share of
business profits is a prima facie evidence that he is a partner. This
presumption however, may be rebutted if there are evidences which show
otherwise, as stated in Section 4(c)(i) to 4(c)(v) of the PA 1961. What are those
exceptions? They are as follows:
An agreement or a contract mutually made by the parties will also assist the court
to decide on any dispute which might arise between them because there are clear
stipulations which would show their intention at the time to form a partnership.
The agreement between the partners may stipulate on several matters, such as the
duration of the partnership, the rights and liabilities of partners, capital
subscription, distribution of profits, name of the firm and other matters. In the
absence of a partnership agreement, Part IV and V of the Partnership Act 1961 will
be applied by the court to settle any disputes which arise.
It is explained in Section 7 of the PA 1961 that other persons who deal with the
firm are entitled to presume that a partner has such authority, even though it is
not given expressly.
A, a partner in borrowers firm was given an express authority by his other partners
to sign a moneylending contract which must not be larger than RM30,000. A
instead borrowed money amounting to RM45,000 from moneylending firm. The
moneylending firm did not know that A had no authority to take loans larger than
RM30,000.
The moneylending firm presumed that as a partner, A had the authority to borrow
more than that amount. Here, the Borrowers Firm and his other partners cannot
deny the loan made by A. His action binds the firm and may be inferred as AÊs
apparent authority.
(a) The act must be of the nature usually carried on by the firm
The third party may presume that the partnerÊs action which has a relation
to the nature of business usually carried on by the firm is an action which
gives the partner the authority to do so. When a firm refused to be liable for
any liabilities due to an unauthorised partnerÊs action, the court, generally,
takes into consideration the opinion of the third party with regard to the
transaction whether it is in any way connected to the nature of business of
the firm.
(b) If the third party has a basis to believe, from the nature of business of the
firm, that the partner has the authority to act as such, then the firm is liable.
This principle was decided in Mercantile Credit v. Garrod (1962). The
partnership firm carried on a business of leasing garages and car repairs. The
agreement between the parties prohibited the business of buying and selling
cars without the other partnersÊ knowledge. One of the partners sold a car to
the plaintiff. The partner in fact had no title on the car he sold. The payment
for the sale was put into the partnership account. The plaintiff wished to
rescind the contract when he came to know that the partner who dealt with
him had no right over the car. He sued for the return of his money.
The court held that the sale of the car in the opinion of the third party, was a
transaction of the same nature to the partnership business. The firm,
therefore, was liable for the partnerÊs action under apparent authority and
should return the sale money to the plaintiff.
The firm is also liable if a partner made a loan for the purposes of enlarging
or developing the business because a partner is presumed to have the
authority to do so. The firm is still liable even if the partner had
misappropriated the loan.
In Chettinad Bank v. Chop Haw Lee & Chop Lee Chan (1931), the defendant,
a pawnshop firm was sued by the Bank for a loan made by one of its partners
even though the partner had used the money for his personal use. The court
held that the firm was liable to pay the loan made by the partner.
The act was done in the usual way the act carried on by the partner or within
the ordinary course of business of the firm for similar transactions or in
accordance to practice of the business of that nature.
(c) The third party dealing with the partner knew or believed the person who
dealt with him is a partner.
Because he believed the person who is dealing with him is a partner, the third
party then presumed that the partner is acting under his apparent authority
as a partner.
In Sithambaram Chetty v. Hong Hing & Ors (1928), the third party, several
chettiars, gave a loan to one of the managers of a partnership firm in Penang
because they believed he was partner in the firm. The manager, in fact was
only managing the business for two actual partners who were residing in
Singapore. The manager who made the loan ran away and the chettiar sued
for the return of the money from the firm. The real partners refused the claim
on the ground that the firm was not liable because the manager was not a
partner.
The court held that the partnership is liable for failure to indicate the
managerÊs position causing third parties to believe him a partner and thus
authorised to make the loan.
(d) The third party who has a dealing with the partner does not know that the
partner has no authority.
Refer to this example.
Nicholas, a partner was given the authority to borrow only RM30,000 for
each loan made. Nicholas borrowed RM45,000 from Bank C who knew that
Nicholas does not have such authority. The firm is not bound by NicholasÊs
act and Bank C cannot allege that it is NicholasÊs apparent authority because
the Bank has the knowledge of the restriction on the amount of loan that
Nicholas could make.
If you refer to the above example you will find that „apparent authority‰ has
a wide meaning. It therefore gives a third party wider scope to use apparent
authority as a basis for any claims against a partnership firm for liabilities
caused by the act of a partner. How then can apparent authority be
restricted?
Provision
„If it has been agreed between the partners that any restriction shall be
placed on the power of any one or more to bind the firm, no act done in
contravention of the agreement is binding on the firm with respect to
persons having notice of the agreement‰.
As an example:
Bahar is a partner in a business which exports Malaysian batik fabrics. Due to the
demands of his foreign customers, Bahar exported Malaysian fruits under the
name of the firm. His other partners knew of his act and consented. The fruits he
exported were spoiled when they reached the destination and his customers sued
for damages from the partnership firm. The firm refused to be liable. Can the third
party (customers) allege that his act was made under his apparent authority as a
partner?
The third party cannot presume that his act was within his apparent authority
because the business of exporting fruits was not of the same nature as the business
of exporting batik fabrics. The customers would not be able to make the firm liable
under apparent authority.
Can they sue the firm by alleging that Bahar had actual authority? The firm may
be liable on actual authority that is by taking into account the conduct of the other
partners who consented Bahar to export the fruits under the name of the firm.
EXERCISE 11.1
The court held that the failure by the retired partners to erase their names from the
letterhead was not a Âholding outÊ. The retired partners therefore were not liable
for the transactions made by using the old letterhead.
Section 16 of the PA 1961 further provides that any statements (spoken or written)
or conduct which may be presumed as Âholding outÊ need not be communicated
personally by the person who was said to be Âholding outÊ to the other party who
acted on such statement or conduct.
Example: A told B that he is a partner in TDK firm. B later told C that A is a partner
in the said firm and C, based on the information gave credit to A. A is liable as a
partner of TDK firm for his debts with C.
The conduct or act of holding out should be a conduct or an act which could
influence the third party to give credit to the firm. If the person who gave credit to
the firm did so but not due to being influenced by the holding out of the person,
the person who held out as a partner will not be liable.
SELF-CHECK 11.2
Qeemnoor held out as one of the partners and his name was stated in the
agreement as one of the partners. What are QeemnoorÊs liabilities as a
partner?
Provision Explanation
Section 19(1) of A partner will not be liable for anything done before he became a
PA 1961 partner.
Section 19(2) of A partner who retires is still liable for anything incurred before his
PA 1961 retirement.
Section 19(3) of A partner who retires may be discharged from any liabilities for
PA 1961 anything done before his retirement through an agreement with his
other partners and the creditors.
Section 38(1) of If there is a change in the constitution of a firm, a person who has
PA 1961 any dealings with the firm is entitled to presume all apparent
members of the old firm as still being members of the firm until he
has notice of the change.
IMPORTANT NOTES
It is important for a firm to inform a third party if a partner have withdrawn
from the partnership. This is to prevent the firm from being liable for any
transactions carried out by the former partner. A partner who wishes to retire
may nominate other person as a partner, but it must be agreed by the firm. The
partner too may also be discharged, if agreed by other partners and creditors,
from his liabilities for debts made before his retirement. This is called the
principle of novation.
EXERCISE 11.2
Rohan retired from being a partner to YY firm two years ago. Last year
YY firm entered into a contract to supply office equipment to Lada Co.
The office equipment supplied was not of quality as promised by YY
firm. Lada Co. wished to sue YY firm and named Rohan as one of the
partners because YY firm failed to remove RohanÊs name when they
carried out the transaction with Lada Co. Advise Rohan.
Provision
An agreement mutually agreed between the partners which outlines all
the rights and liabilities in a partnership must be in accordance with the
requirement of utmost fairness and good faith towards all other partners.
This requirement will ensure the partnership business would progress
well and executed in a proper manner.
(b) In the absence of such agreement, the relations will be in accordance with the
provisions of the Act.
Azly, Letchumi, Michael Sagumugan, Ah Long and Leng Peen mutually agreed to
set up a partnership business. Being friends for a long time, they did not bother to
make any written agreement for the formation of the partnership. Can they bring
any disputes regarding the distribution of profits of the firm to court? The answer
would be NO!
In the absence of any agreement between the partners which stipulates the rights
and liabilities, reference must be made to the Partnership Act 1961. The Act
provides several provisions which may be applied to settle any arising disputes in
respect of relations of partners to each other. Section 26 of the PA 1961 provides:
The interest of partners in the partnership property and their rights and duties in
relation to the partnership shall be determined subject to any agreement, express
or implied between the partners by the following rules:
(a) All the partners are entitled to share equally in the capital and profits of the
business, and must contribute equally towards the losses, whether of capital
or otherwise, sustained by the firm.
In short, this provision requires partners to equally contribute to the capital
and to equally suffer any losses suffered by the firm. Does this mean that a
rich partner cannot contribute a bigger portion than the other partners?
You must note that this provision does not restrict a partner from
contributing a bigger portion than the other partners. If a bigger portion is
contributed by one of them, and in the absence of an agreement which states
the distribution of profits would be in accordance with the portion of capital
contributed, the partner who contributed more would still receive the same
equal share of profits as his other partners.
The distribution of profits will be made equally among the partners without
regard to the amount of capital subscribed, if there is no agreement to the
contrary. In Stewart v. Forbes (1849), there was an agreement made which
stipulated that the partners mutually agreed to share the profits according to
the amount of capital contributed. The profits therefore would not be shared
equally and the provision of the Act did not apply.
If the firm suffers from any losses, how would the losses be shared? In Re
Albion Life Assurance Society (1880), it was decided that if there was an
agreement which stipulates the distribution of profits in a certain proportion,
any losses suffered should be shared in the same proportion too.
(b) The firm must indemnify every partner in respect of payments made and
personal liabilities incurred by him:
(i) In the ordinary and proper conduct of the business of the firm.
(ii) In or about anything necessarily done for the preservation of the
business or property of the firm.
This provision means that a firm must indemnify a partner who had used his
own money when he carried out any transaction for the firm. The firm should
be liable too for any liabilities faced by any of the partners while carrying out
the business of the firm.
In Ong Keng Huat v. Hong Kong United Corporation (1961), there was a
partnership agreement mutually agreed between the partners to give a task
to the appellant, one of the partners, to insure equipment in a theatre which
belonged to the partnership business. The equipment were damaged in a fire.
The appellant failed to insure them as instructed. His other partners claimed
that the appellant was personally liable due to his failure to insure them as
instructed.
The Court of Appeal decided that the other partners were jointly liable for
the losses because there was no fraud or negligence committed by the
appellant when he failed to insure the equipment. There was only a breach
of duty by the appellant.
It is clear therefore from the facts and decisions made, that a partnership firm
in cases where there are losses, must bear the liabilities of its partners if it
does not involve any fraud or negligence committed by the concerned
partner. This was decided in Kok Hong Leong & Ors. v. Seow Kah Cheng &
Ors (1950).
(c) Any actual payment or advance beyond the amount of capital which he has
agreed to subscribe, is entitled to interest at the rate of eight per cent per
annum from the date of the payment or advance.
If a partner made any payment larger than the amount stipulated for capital
subscription, this payment will be considered as an advance to the firm. That
partner therefore is entitled to an interest at the rate of eight per cent on the
excess from the date he made the payment or advance.
(e) Every partner may take part in the management of the partnership firm.
Every partner has the right to take part in the management of the partnership
firm and other partners could not deny this right. This is however subject to
any agreement mutually agreed between them. An agreement which gives
the authority to manage to a certain partner only but excluded the others is
therefore valid.
(g) No person may be introduced as a partner without the consent of all existing
partners.
If any partners wishes to nominate any new partner into the partnership, the
consent of all partners must first be obtained. This is in accordance with the
duty of the partners to act fairly and in good faith to each other.
If there are any disputes in respect of any changes with the nature of the
partnership business, consent of all partners must be obtained. The case of
Tham Kok Cheong & Ors v. Low Pui Heng (1966) can be used as an example.
Several partners decided to sell the partnership firm to a limited company
without the consent of one of the partners. The court held that the sale was
not valid because consent of all partners was not obtained.
Every partner has the right to examine all partnership books or documents.
To enable such right be available to the partners, all partnership books must
be kept at the place of business of partnership, or the principal place, if there
is more than one.
Provision Explanation
Section 30 of This Section explains on the duty of a partner to render true
the PA 1961 accounts and full information on all things affecting the
partnership to the other partners or agent.
Section 31 of This Section provides for duties of a partner to account to the
the PA of 1961 firm any personal benefit he derived, without the consent of the
other partner, from transactions in connection with the
partnership, or from any use by him of the partnership property,
name or business connection, as a partner.
Section 32 of This Section provides where a partner must account for and pay
the PA 1961 over to the firm all profits made by him if such transactions is of
the same nature or competing business with that of the firm.
EXERCISE 11.3
A partnership which was formed could be dissolved and its activities terminated
by three ways. Figure 11.1 illustrates how such dissolution is made.
In such cases, Section 34(2) of the PA 1961 provides that the date of dissolution of
a partnership is from the date mentioned in the notice as the date of dissolution. If
the notice does not state the date of dissolution, a partnership is dissolved at the
date of the communication of notice.
A dissolution is not valid if there is a failure to notify all partners. This was decided
in Tham Kok Cheong & Ors v. Low Pui Heng (1966).
EXERCISE 11.4
2. Tunas Bakti (TB) was a firm which was jointly set up by Dol and 22
others. The firm was set up for the purposes of carrying on a
business of supplying computers to computer dealers in the
Northern region. In June 2001, TB entered into a transaction with
Computer Centre (CC), a company carrying on a business of selling
computers. The transaction was to supply 100 units of Compaq
computers to CC within a week. TB supplied the 100 units in
accordance with the agreed period. CC later found that the
computer TB supplied were not Compaq but Lompaq. CC is
unhappy and wishes to sue TB.
Advise CC.
• Section 3(1) of the PA 1961 defines partnership as „the relation which subsists
between persons carrying on business in common with a view of profit‰.
• Each and every partner is an agent of the firm and his other partners for the
purposes of carrying on the business of the partnership.
• Authority as an agent may be divided into two that is apparent authority and
actual authority
OR
Thank you.