THE LAW OF CONTRACT

A contract is an agreement between 2 or more parties which is legally binding between

them.

Under S2(h) of the Contracts Ac 1950, a contract is an agreement enforceable by law.

The principle legislation for the law of Contract in Malaysia is the Contracts Act 1950.

The basis of all contracts is an agreement. Therefore, all contracts must be built upon an
agreement but not all agreements automatically amounts to a contract.

Agreements become a contract if the essential elements of a contract are fulfilled.

Example of the essential elements of a contract:

• Offer
• acceptance,
• consideration
• intention to create legal relations,
• certainty
• capacity

OFFER AND ACCEPTANCE

Proposal or Offer

Section 2(a) of the Contracts Act 1950 defines proposal (or offer) to mean ‘when one
person signifies to another his willingness to do or abstain from doing anything, with a
view to obtain the assent of that other to the act or abstinence’.

An offer is an expression of willingness to contract on certain terms. It must be made

with an intention that it will become binding (obligation that cannot be broken) upon
acceptance.

PROMISOR/OFFEROR – the person making the offer/proposal

PROMISEE/OFFEREE - the person accepting the proposal

Example 1

A approaches B and states, “I’d like to rent your 500 acres to plant vegetables and I will
pay 40% of the input costs and receive 40% of the profits.” Person B agrees to Person
A’s terms.

In Example 1, A makes the offer and B accepts the offer.

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Example 2:

A approaches B and states, “I will not grow crops on my land for ten years if I receive
RM 500 per acre per year.” B agrees to A’s terms.

In Example 2, Person A makes the offer and Person B accepts the offer.

WHAT ARE THE REQUIREMENTS OF A PROPOSAL?

• The subject matter of the proposal / offer must be certain; and

• The proposal must be communicated to the offeree - Section 4 (1)

A unilateral offer is where one party offers and the other party accepts by
performing.

Example of unilateral offer – Carlill v Carbolic Smoke Ball Co. Ltd.

In an advertisement by Carbolic Smoke Ball (CSB), they advertised that if anyone

bought and used their product in accordance to the instructions given and their
influenza isn’t cured, the company will pay the person £100. Mrs. Carlill bought
and used the product following the instructions given. However she continued to
suffer from influenza. Therefore, she claimed against CSB.

DECISION

The court held that CSB had made a unilateral offer to ‘the world at large’,
which included Mrs. Carlill. Mrs. Carlill had indicated her ‘acceptance’ by
buying and following the ‘conditions’ of CSB, when she followed the instructions
in the box when she used it. The contract was complete and valid and therefore,
the court held that CSB must pay Mrs. Carlill as promised.

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Offer must be distinguished from an option, preliminary negotiations and an invitation
to treat.

OFFER v OPTION

An option is a device whereby the offeror keeps his offer open for a specified time in
return for a price

Example: A makes an offer to B to sell his car for RM 40,000.The offer to be open for 10
days from date of the offer provided B agrees to pay A RM10.

OFFER V SUPPLY OF INFORMATION

An offer must be distinguished from a mere supply of information because not all
statements made in the course of negotiations can be considered as an offer that can be
accepted to form a contract. A supply of information is merely an invitation to treat.

Harvey v Facey [1893]

P: Will you sell us Bumper Hall Pen? Telegraph lowest cash price.
D: Lowest price for Bumper Hall Pen, £900.
P: We agree to buy Bumper Hall Pen for £900 asked by you. Please send us
your title deeds.

DECISION
It was held that there was no contract. The second telegraph was not an offer, but only
an indication of the minimum price if the defendants ultimately resolved to sell, and the
third telegram was therefore not an acceptance.

The 3rd telegram is an offer which was capable of acceptance, but was never accepted.
Also the reply by D was not an offer but merely a supply of information as to what
is the minimum price. A supply of information is an invitation to treat.

OFFER V INVITATION TO TREAT (ITT)

An ITT is an invitation to make an offer, negotiate or deal and hence has no legal
consequences and cannot be accepted to form a contract.

In Hart v Mills [1846] 15 LJ Ex 200, the court described an invitation to treat as an “offer
to negotiate”, “no offer to be bound by any contract” and “offers to receive offers”.

Examples

• Display of Goods
• Advertisements , catalogues & circulars
• Auctions
• Tenders
• Price list / Request for Price Quotes/ Supply of information

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Display of Goods

Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd.

Pharmaceutical Society of GB charged Boots Cash Chemist Ltd for breaching the law
against selling drugs that were labelled as poison without the supervision of a
registered pharmacist. This is because the drugs were displayed on a shelf in the
pharmacy and customers could pick it up themselves and take it to the counter for
payment.

It was highlighted to the court that although a pharmacist wasn’t ‘dispensing’ the drug
to the customer, a registered pharmacist was always present at the casher to advise
customers and ensure relevant procedure of dispensing such drugs were followed
before the casher accepts the money from the customer.

The court held that the display of the drugs at the shelf was merely an ‘invitation
to treat’ from Boots Chemist and not an ‘offer’. The customer makes an ‘offer to
buy’ at the cashier. Acceptance is indicated and the contract concluded only when
the cashier ‘rings the till’ of the cash register.

Therefore, Boots Chemist was incompliance of the requirement because when the
customer picked up the drug from the shelf, the sale wasn’t concluded; instead the sale
was concluded only when the customer made an ‘offer to buy’ and it was ‘accepted’ by
the cashier ringing the till with the presence of a pharmacist.

Fisher v Bell

A shopkeeper displayed a flick knife for sale in his shop window. This was not allowed
under the Offensive Weapons Act 1939 (UK).He was charged with ‘offering for sale’ the
offending weapon under the Act.

Held
He was not guilty as he had not offered the knife for sale as the display was an ITT
and not an offer.

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• Advertisements , catalogues & circulars
Syarikat Gunung Sejahtera Sdn Bhd v. Lim Sze On & Ors. [2007] 5 MLJ 201 the
Court of Appeal stated that “… as a general rule, an advertisement is considered
by courts as a mere invitation to treat, that is to say, an offer to make offers”.

Partridge v Crittenden (1968)

Partridge published a classified where he indicated he had Bramblefinch cocks
and Branmblefinch hens but the advertisement itself did not make any offer for
the sale of the birds. However, another person sent a cheque to Partride and
asked for a hen, which Partridge provided in a box.

However, in terms of the Protection of Birds Act, 1954, offering for sale this
particular species of wild birds was an offence and Partridge was convicted by
the Magistrate.

On appeal, the high court decided that the advertisement was not an offer but an
invitation to treat.

NOTE:
However, the advertisements which come under the category of unilateral
contracts are considered as offers rather than invitations to treat.

Advertisements of bilateral contracts (job advertisements) are not offers!!!!

It depends on the intentions of the parties in a case.

• Auctions - Payne v Cave

Payne v Cave
D made the highest bid and withdrew it before the fall of the hammer. The court
held that the bid itself constituted the proposal or the offer which the auctioneer
was free to accept by the fall of the hammer or reject it. Since the bid was
withdrawn before the fall of the hammer, there was no contract between the
parties.

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 How does an auction take place?

 When the auctioneer asks for biddings, this is an invitation to treat .

 An offer is made when the bid is put in. The highest bid is the final offer.

 Section 5(1) CA 1950 states that a proposal can be revoke at any time before
acceptance.

 In the auction house, by trade practice, the fall of the hammer indicates
acceptance by the auctioneer – Payne v Cave.

When can the offer be withdrawn?

Before the hammer falls. If it is withdrawn after the hammer has fallen, then you are
bound as the auctioneer has accepted your offer, and a contract is formed.

• Tender

A tender is a call for persons to place offers or do something or supply goods.

A tender is an ITT and not an offer.

Example: A university wants to erect a new building and hence advertises for qualified
builders to send in their tenders. These tenders will be examined and by the university
and then decision will be made to accept any of them. A contract will come into
existence when the tender by a specific company is selected.

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TERMINATION OF AN OFFER

REJECTION

COUNTER OFFER
TERMINATION OF OFFER

REVOCATION
(COMMUNICATION OF NOTICE OF
REVOCATION)

LAPSE OF TIME

FAILURE TO FULFILL A CONDITION

PRECEDENT TO ACCEPTANCE

DEATH OR MENTAL DISORDER OF

OFFEROR R

 Rejection

If an offer is rejected, it comes to an end.

 Counter offer

This is where the offeree introduces a new term to an offer.

Example: A wants to sell his car to B for RM50,000 and B indicates he will buy it
for RM40,000. Therefore, B is introducing a new term and hence is making a
counter offer.

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 Revocation
Revocation refers to the canceling or annulling of something previously done
(withdrawal).

An offer/ proposal can be revoke at any time before it is accepted:

This is found in Section 5 (1) CA which states that a proposal may be revoked at any
time before the communication of its acceptance is complete as against the proposer but
not afterwards

Routledge v Grant
Grant offered to buy Routledge’ house and gave him 6 weeks to decide whether to
accept the offer. Before the 6 weeks had lapsed, Grant withdrew his offer. It was held
that in absence of Routledge having accepted, Grant was entitled to revoke his offer.

S 4 (3) – The 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

(b) as against the person to whom it is made when it comes to his knowledge

Byrne & Co v Van Tienhoven (1880)

Posting of letter of revocation is communicated to the addressee when it is received and

not when it is posted.

Example
A revokes his proposal by telegram.
The revocation is complete as against A when the telegram is dispatched (sent). It is
complete against B when B receives it

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 S6 (a) states that an offer can be revoke by the communication of the notice of
revocation by the proposer to the other party.

o E.g. In order to revoke his offer, X must communicate the notice of revocation
of his offer to Y before Y accepts.

 S6 (b) states that an offer can be revoke by the lapse of time prescribed in the
proposal for its acceptance, or, if no time is so prescribe, by the lapse of a reasonable
time, without communication of the acceptance.

 S6 (c) states that an offer can be revoke by the failure of the acceptor to fulfill a
condition precedent to acceptance. A proposal may contain a condition precedent. If
the offeree is unable to fulfill this condition precedent, this will result in the proposal
being terminated.

What is the meaning of failure to fulfill a condition precedent?

E.g. If a company offers to employ an applicant on condition, he passes a health

test, if the applicant fails his health test, he has failed to fulfill the condition
precedent.

 S6 (d) states that an offer can be revoked by the death or mental disorder of the
proposer, if the fact of the death or mental disorder comes to the knowledge of the
offeree before acceptance.

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ACCEPTANCE
Section 2(b) CA 1950 defines acceptance;

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

Acceptance is one person's compliance with the terms of an offer made by another,

Similar to an offer, the acceptance to an offer must also be effectively communicated to

the offeror before the contract is concluded and there is a valid contract.

The offeree must signify his

acceptance.
RULES OF ACCEPTANCE

Acceptance in only complete

when it is communicated to
the offeror.

Acceptance must be in
reliance on the offer

Acceptance must be within

reasonable time

Acceptance must be in the

prescribed manner

Acceptance must be
absolute and unqualified

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 The offeree must signify his acceptance.

Sec 2(b) Contracts Act 1950 – ‘when the person to whom the proposal is made
signifies his assent…the proposal is said to be accepted’.

This means in order for there to be a valid contract the offeree must convey his
acceptance to the offeror. There must be a positive act of acceptance such as
performing conditions of the offer

SILENCE, ABSENCE OF A RESPONSE AND TOTAL DISREGARD OF THE OFFER IS NOT

ACCEPTANCE BECAUSE THERE IS NO POSITIVE ACT PF ACCEPTANCE BY THE OFFEREE

Section 9 - if the acceptance is made in words, the acceptance is ‘expressed’. If the

acceptance is made other than in words, the acceptance is implied.

When the proposal is accepted then under Section 2 (c) - ‘the person making the
proposal is now called the ‘promisor’ and the person accepting the proposal is called
the “promisee”.

 Acceptance in only complete when it is communicated to the offeror.

This means the acceptance is only effective when it is communicated to the offeror.

Communication is not needed if

o the offeror has dispensed with the need for it or if
o offeror requires the offeree to perform the conditions of the offer.
o The offeror allows the acceptance of any consideration for a reciprocal
promise which may be offered with a proposal.
(offer comes with a reciprocal promise)

Reciprocal promise: promise in exchange for another promise

EXAMPLE : A sends B a cheque for RM 1000/- with the proposal that it will the consideration
for B’s agreement to sell his motorbike. If B cashes the cheque even though he has yet to
communicate to A of his acceptance. B is deemed to have accepted the proposal. B has
accepted a consideration for a reciprocal promise offered with a proposal

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Postal Rule (communication of acceptance using postal service)

Acceptance by post takes effect when the letter of acceptance is posted.

Section 4(2)(a) – A contract is formed for the offeror as soon as the letter is posted
Section 4(2)(b)- The contract is concluded for the offeree, as soon as it comes to
the knowledge of the offeror.

A proposes, by letter, to sell a house to B at a certain price.

B accepts A’s proposal by a letter sent by post.
The communication of the acceptance is complete— as against A, when the letter is posted;

The communication of the acceptance is complete as against B, when the letter is received by A.

*Adams v Lindsell
*Ignatius v Bell
*Section 4 (2) (a) Contracts Act 1950

‘When a contract is made by post it is clear law … that acceptance is complete as soon
as the letter of acceptance is put into the post box, and that is the place where the
contract is made’. This puts the risk of delay or disappearance of the letter of acceptance
on the offeror.

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When is the postal rule excluded?

In the case of Holiwell Securities v Hughes

Postal rule does NOT apply where

 Notice is needed. Notice means actual communication and postal rule might be
inappropriate.

 it would produce a "manifest inconvenience or absurdity"

 in cases of instantaneous circumstances e.g. telephone, telex, telefax or in today’s

case using sms.

Entores v Miles Far East Corp. [1955] 2 QB 327

Facts:

The plaintiff, based in London, sent an offer by telex (an instant, electronic method) to
purchase copper cathodes from the defendant, based in Amsterdam. The defendant
accepted by telex.

Held:

The postal rule does not apply to electronic forms of communication which are
instantaneous or virtually instantaneous. Therefore, acceptance must be communicated.
It provides no direct authority on the issue of when a telexed acceptance takes effect.

Denning LJ: .. the rule about instantaneous communications between the parties is
different from the rule about the post. The contract is only complete when the
acceptance is received by the offeror; and the contract is made at the place where the
acceptance is received.

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  Acceptance must be in the prescribed manner
Section 7 (b) provides that acceptance must be expressed in some usual and reasonable
manner, unless the proposal prescribes the manner in which it is to be accepted.

Offeror cannot prescribe silence as a manner of acceptance

It has been held that the offeror cannot prescribe ‘silence’ as a manner of acceptance.

Felthouse v Bindley [1862] EWHC CP J35 Court of Common Pleas

A nephew discussed buying a horse from his uncle. He offered to purchase the horse and said if I
don't hear from you by the weekend, I will consider him mine. The horse was then sold by mistake
at auction. The auctioneer had been asked not to sell the horse but had forgotten. The uncle
commenced proceedings against the auctioneer for conversion. The action depended upon whether
a valid contract existed between the nephew and the uncle.

Held: There was no contract. silence does not constitute acceptance

 Acceptance must be in reliance on the offer

The person who wants to accept the offer must be aware of the offer. This is the
necessary nexus between offer and acceptance.

In R v Clarke, a person charged with murder gave information to the police that led to
someone else (the true offender) being arrested. He later tried to claim a reward that
was offered for the information. He could not accept the offer because when he gave the
information, he was not aware of the offer.

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 Acceptance must be within reasonable time
Section 6 (b) states - A proposal is revoked by the lapse of time prescribed in the
proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable
time, without communication of the acceptance.

What is ‘reasonable time’ depends on the circumstances of the case in question.

 Acceptance must be absolute and unqualified

Section 7 CA states, to convert a proposal into a promise the acceptance must -
be absolute and unqualified;

Section 7 (a) means the acceptance must be absolute and unqualified so that there is
complete consensus. If the parties are still negotiating, there is no agreement yet or
if any new terms or conditions are brought into the picture then there would be no
acceptance.
Here are two situations where acceptance is NOT ABSOLUTE AND IS QUALIFIED:

• Acceptance subject to a contract

• Counter offer

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 Counter offer

An acceptance which is qualified by the introduction of a new term or condition may be

seen as a ‘counter offer’ – see Hyde v Wrench. Any modifications to the terms of the
proposal by the offeree would amount to a counter proposal.

A counter offer is no acceptance. The effect of a counter offer is that it rejects or

destroys the original offer and replaces it with a new offer, this time, from the other
party who was offered originally.

Hyde v Wrench

6 June - D offered to sell his estate to P for £1000.

7 June – P replied that he will pay £950 – here P made a counter offer.
8 June - D refused to accept P’s proposal.

When D refused, P wrote again this time agreeing to pay £1000 – this is an attempt to
revive the original proposal.
It was held that no acceptance had taken placed because P’s letter of 8 June amounts to
a rejection of the original proposal which could not be revived.

(ii) Acceptance ‘Subject to contract’

In cases where the parties agreed but the acceptance is qualified with the term ‘subject
to contract’ or ‘subject to a formal contract’. Here the acceptance is subject to a
condition.

Conditional acceptance is no acceptance until the offeror agrees to the condition.

Therefore the condition would have to be fulfilled before there can be a contract.

This is because the intention of the parties is not to make a concluded bargain as yet,
unless and until they have executed a formal contract.

Low Kar Yit & Ors V Mohd Isa & Anor

D gave option to P’s agent to purchase a parcel of land subject to a formal contract being drawn up
and agreed by the parties. P’s agent exercised the option but D failed to sign the agreement. P sued
for breach of contract.
The High Court held there was no binding contract. ‘The option on the face of it was clearly
conditional upon and subject to ‘a formal contract to be drawn up and agreed upon’ between the
parties.

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REVOCATION OF ACCEPTANCE

How can a person revoke his acceptance?

S 5(2) CA states that an acceptance may be revoke at any time before the
communication of its acceptance is complete as against the proposer, but not
afterwards.
The above means that the acceptor after having accepted an offer and now wants to
revoke his acceptance, he must do so before his notice of acceptance reaches the offeror.

Illustration:

Alice proposes, by a letter sent by post, to sell her house to Ben.

Ben accepts Alice’s proposal and replied by letter which he posted back to Alice.

Ben may revoke his acceptance but it must be at any time before his letter of
acceptance reaches Alice, but not afterwards.

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DEFINITIONS
CONTRACT

A contract is an agreement between 2 or more parties which is legally binding between

them.

OFFER

Section 2(a) of the Contracts Act 1950 defines proposal (or offer) to mean ‘when one
person signifies to another his willingness to do or abstain from doing anything, with a
view to obtain the assent of that other to the act or abstinence’.

An offer is an expression of willingness to contract on certain terms. It must be made

with an intention that it will become binding (obligation that cannot be broken) upon
acceptance.

INVITATION TO TREAT

An ITT is an invitation to make an offer, negotiate ore deal and hence has no legal
consequences and cannot be accepted to form a contract.

In Hart v Mills [1846] 15 LJ Ex 200, the court described an invitation to treat as an “offer
to negotiate”, “no offer to be bound by any contract” and “offers to receive offers”.

ACCEPTANCE

Section 2(b) CA 1950 defines acceptance;

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

COUNTER OFFER

An acceptance which is qualified by the introduction of a new term or condition may be

seen as a ‘counter offer’ – see Hyde v Wrench. Any modifications to the terms of the
proposal by the offeree would amount to a counter proposal

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 CASE LAWS

• Advertisement amounted to an offer made to any person who performs the

Carlill v Carbolic Smoke Ball Co. Ltd. conditions set out in the advertisement and that the offer was accepted when a
person performs those conditions.

• display of the goods is an ‘invitation to treat’ and not an ‘offer’.

Fisher v Bell

• Supply of information is an invitation to treat and not an offer

Harvey v Facey

Pharmaceutical Society of Great Britain • display of the goods is an ‘invitation to treat’ and not an ‘offer’.
v Boots Cash Chemist Lt

Syarikat Gunung Sejahtera Sdn Bhd v. •as a general rule, an advertisement is considered by courts as a
Lim Sze On & Ors. mere invitation to treat

• advertisement was not an offer but an invitation to treat.

Partridge v Crittenden

• In the auction house, by trade practice, the fall of the hammer

Payne v Cave indicates acceptance by the auctioneer

• Posting of letter of revocation is communicated to the addressee

Byrne & Co v Van Tienhoven when it is received and not when it is posted.

Adams v Lindsell
Entores Ltd. v Miles Far East •acceptance is complete as soon as the letter of acceptance is put
Corporation into the post box
Ignatius v Bell

• Postal rule does NOT apply where

• Notice is needed. Notice means actual communication and

postal rule might be inappropriate.
Holiwell Securities v Hughes
• it would produce a "manifest inconvenience or absurdity"
• in cases of instantaneous circumstances e.g. telephone, telex,
telefax or in today’s case using sms.

•The postal rule does not apply to electronic forms of

Entores v Miles Far East Corp. communication which are instantaneous or virtually instantaneous

• Acceptance must be within reasonable time

Ramsgate Victoria Hotel v Montefoire

• offeror cannot prescribe ‘silence’ as a manner of acceptance.

Felthouse v Bindley

•An acceptance which is qualified by the introduction of a new term

Hyde v Wrench or condition may be seen as a ‘counter offer’

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