BMLW5103 Business Law

BMLW5103
BUSINESS
LAW
Dr Rozanah Abdul Rahman
Copyright © Open University Malaysia (OUM)

Project Directors: Prof Dr Mansor Fadzil
Prof Dr Mohd Ghazali Mohayidin
Open University Malaysia
Module Writer: Dr Rozanah Abdul Rahman

Universiti Putra Malaysia
Moderator: Dr Azlinor Sufian

International Islamic University Malaysia
Developed by: Centre for Instructional Design and Technology

Open University Malaysia
Printed by: Meteor Doc. Sdn. Bhd.

Lot 47-48, Jalan SR 1/9, Seksyen 9,
Jalan Serdang Raya, Taman Serdang Raya,
43300 Seri Kembangan, Selangor Darul Ehsan
First Printing, April 2009

Sixth Printing, December 2010
Seventh Printing, March 2011
Copyright © Open University Malaysia (OUM), March 2011, BMLW5103
All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia (OUM).
Version March 2011

Table of Contents
Course Guide xi - xxi
Course Assignment Guide xxv – xxix
Topic 1 Law of Contract (Proposal and Acceptance) 1

1.1 Definition of Contract and Elements of a Valid Contract 2
1.2 Proposal or Offer 4
1.2.1 To Whom Can the Proposal be Made? 4
1.2.2 The Difference between a Proposal and an Invitation 5
to Treat
1.2.3 Proposal must be Clear and Communicated 7
1.2.4 Revocation of Proposal 8
1.3 Acceptance 11
1.3.1 Acceptance must be Absolute and Unqualified 11
1.3.2 Acceptance must be Communicated 13
1.3.3 Revocation of Acceptance 16
Summary 17
Key Terms 18
References 18
Topic 2 Law of Contract (Consideration) 20

2.1 Executory, Executed and Past Consideration 21
2.2 Exceptions to the Rule of Consideration 24
2.2.1 Agreement Made on Account of Natural Love 24
and Affection
2.2.2 Agreement to Compensate a Past Voluntary Act 26
2.2.3 Agreement to Pay a Statute-Barred Debt 27
2.3 Must Consideration Move From the Promisee? 29
2.4 Adequacy of Consideration 30
Summary 33
Key Terms 33
References 33
Topic 3 Law of Contract (Intention to Create Legal Relations) 35

3.1 Domestic, Family and Social Agreements 36
3.2 Business or Commercial Agreements 41
Summary 44
Key Terms 45
References 45

iv  TABLE OF CONTENTS
Topic 4 Law of Contract (Capacity to Contract) 47

4.1 Minors 49
4.1.1 Valid Contracts (Exceptions to Minors) 50
4.2 Person of Sound Mind 54
Summary 56
Key Terms 57
References 57
Topic 5 Law of Contract (Free Consent to Contract) 58

5.1 Coercion 59
5.1.1 Effect of Coercion 60
5.2 Undue Influence 61
5.2.1 Real or Apparent Authority 61
5.2.2 A Fiduciary Relation 62
5.2.3 Mental Capacity is Temporarily or Permanently 63
Affected by Reason of Age, Illness, or Mental;
or Bodily Distress
5.2.4 Burden of Proof 63
5.2.5 Effect of Undue Influence 65
5.3 Fraud 67
5.3.1 Effect of Fraud 69
5.4 Misrepresentation 70
5.4.1 Effect of Misrepresentation 71
5.5 Mistakes 73
5.5.1 Mistake of Fact 73
5.5.2 Mistake of Law 75
5.5.3 Mistake as To Document 75
5.5.4 Effect of Mistake 76
Summary 79
Key Terms 80
Reference 80
Topic 6 Law of Contract (Void and Illegal Contract) 82

6.1 Contracts Forbidden by Law and If Permitted, 83
Defeat the Law
6.2 Fraudulent Contracts 85
6.3 Contracts Injurious to Person or Property of Another 85
6.4 Contracts Immoral or Against Public Policy 86
6.5 Other Void Contracts 88
6.5.1 Contracts in Restraint of Trade 89
6.5.2 Contracts in Restraint of Legal Proceedings 90
6.5.3 Effect of Contracts under Section 28 And 29 91
6.6 Consequences of Illegality 92

TABLE OF CONTENTS  v
Summary 95
Key Terms 95
Reference 95
Topic 7 Law of Contract (Discharge of Contract And Remedies) 97

7.1 Discharge by Consent or Agreement Between Parties 98
7.1.1 Novation, Rescission and Alteration 98
7.1.2 Remission of Performance 99
7.2 Discharge by Performance 101
7.2.1 Time and Place of Performance 102
7.2.2 Performance of Reciprocal Promise 104
7.2.3 Performance by Third Party 104
7.3 Discharge by Impossibility 105
7.3.1 Effect of Frustration 107
7.4 Discharge by Breach 108
7.5 Remedies 110
7.5.1 Rescission of Contract 110
7.5.2 Damages 111
7.5.3 Specific Performance 113
7.5.4 Injunction 116
7.5.5 Quantum Meruit 117
Summary 119
Key Terms 120
Reference 120
Topic 8 Law of Agency (Part 1) 122

8.1 Capacity 123
8.2 Formation of Agency 123
8.2.1 Agency by Express Appointment 124
8.2.2 Agency by Implied Appointment 124
8.2.3 Agency by Ratification 126
8.2.4 Agency by Necessity 128
8.2.5 Agency by Estoppel or Holding Out 129
8.3 Authority of an Agent 130
8.3.1 Actual Authority 130
8.3.2 Apparent or Ostensible Authority 131
Summary 134
Key Terms 134
Reference 134

vi  TABLE OF CONTENTS
Topic 9 Law of Agency (Part II) 136

9.1 Duties of Agent to Principal 136
9.2 Duties of Principal to Agent 144
9.3 Effects of Contracts Made by Agents 151
9.3.1 A Named Principal 151
9.3.2 An Undisclosed Principal 151
9.4 Termination of Agency 152
9.4.1 Termination by the Act of the Parties 152
9.4.2 Termination by Operation of Law 154
Summary 155
Key Terms 156
References 156
Topic 10 Law of Partnership (Part I) 158

10.1 Definition of Partnership and its Characteristics 159
10.2 Formation of Partnership 165
10.2.1 Partnership under the Law 165
10.2.2 Lawful Purpose 165
10.2.3 Capacity 166
10.2.4 Partnership Agreement 166
10.2.5 Registration of Partnership 166
10.3 Relationship of Partners and Outsiders (Third Parties) 169
10.3.1 Partner's Authority to Bind the Firm 169
10.3.2 Liability of Partners 171
Summary 177
Key Terms 179
References 179
Topic 11 Law of Partnership (Part II) 181

11.1 Relationship between Partners 182
11.1.1 Mutual Rights and Duties of Partners 182
11.1.2 Obligations of Partners to Act in Utmost Good Faith 185
11.2 Incoming and Outgoing (Retiring) Partners 187
11.3 Assignment of Share 188
11.4 Partnership Property 190
11.5 Dissolution of Partnership 193
11.6 Partnership Accounts Settlement 194
Summary 196
Key Terms 197
References 197

TABLE OF CONTENTS  vii
Topic 12 Law of Sale of Goods (Part I) 198

12.1 Definition of Goods 199
12.2 Contract of Sale 199
12.3 Terms of Contract 200
12.4 Implied Terms 201
12.4.1 Title 202
12.4.2 Sale of Goods by Description 203
12.4.3 Fitness for Purpose and Merchantable Quality 204
12.4.4 Sale by Sample 207
12.5 Transfer of Property in the Goods and Risk 210
12.5.1 Effects of the Contract 210
Summary 214
Key Terms 215
References 215
Topic 13 Law of Sale of Goods (Part II) 216

13.1 Transfer of Title by Seller Who is not the Owner and 217
Its Exceptions
13.1.1 Estoppel 218
13.1.2 Sale by a Merchantile Agent 219
13.1.3 Sale by One of Joint Owners 220
13.1.4 Sale under a Voidable Contract 220
13.1.5 Sale by a Seller in Possession after Sale 220
13.1.6 Sale by a Buyer in Possession after Sale 221
13.2 Performance of Contract 222
13.3 Remedies for Breach 225
13.3.1 Breach by the Buyer 225
13.3.2 Rights of Unpaid Seller against the Goods 226
(SellerÊs Remedies)
13.3.3 Breach by the Seller and the BuyerÊs Remedies 230
Summary 233
Key Terms 233
References 234
Topic 14 Law of Hire-Purchase 235

14.1 Definition of Hire-purchase 236
14.2 Meaning of Goods under the Hire-purchase Act 1967 237
14.3 Formation of the Hire-purchase Agreement 238
14.3.1 Pre-contractual Obligations 239
14.3.2 Construction of a Hire-purchase Agreement 239
14.3.3 Post-contractual Obligations 241
14.4 Rights and Protections of Hirers 241
14.4.1 Implied Conditions 242

viii  TABLE OF CONTENTS
14.4.2 Implied Warranties 242

14.5 Liability of Owner and Dealer for Misrepresentation 243
14.6 Statutory Rights of the Hirer 243
14.7 Repossession of Goods by the Owner 245
14.7.1 Procedures Prior To Repossession 245
14.7.2 Procedures during Repossession 247
14.7.3 Procedures after Repossession (Rights of The 248
Hirer after Repossession)
14.8 Insurance 249
Summary 252
Key Terms 252
References 253

COURSE GUIDE

x  COURSE GUIDE

COURSE GUIDE  xi
Table of Contents
Welcome to BMLW5103 xii
What will you get from doing this course? xii

Description of the course
Aim of the course
Objectives of the course
How can you get the most from this course? xiii
Learning package
Course topics
Organisation of the course content
How will you be assessed? xix

Assessment Format
What support will you get in studying this course? xix

Tutorials
MyVLE Online Discussion
Facilitator/ Tutor
Library resources
Learner Connexxions
How should you study for this course? xx

Time commitment for studying
Proposed study strategy

xii  COURSE GUIDE
WELCOME TO BMLW5103 BUSINESS LAW

BMLW5103 Business Law is one of the required courses for the Master of
Business Administration and Master of Management programmes. The course
assumes you have little or no previous knowledge of business law but you are
required to tap into your experiences and relate them to the basic principles of
law that will be discussed in the course. This is a three-credit hour course
conducted over a semester of 14 weeks.
WHAT WILL YOU GET FROM DOING THIS COURSE?

Description of the Course
Being a student in a business course, knowledge on business law is expected. Thus, this
course begins with detailed discussions on the Law of Contract. The understanding on
this law of contract will help you to understand other types of contracts in business. The
law of contract will cover discussions on the elements to form a valid contract, factors
vitiating consent of parties, terms of contract, void contracts, termination of contracts
and remedies available in cases of breach of contract.
This is followed by the Law of Agency (Part I and II). In these topics, there will be
discussions on the creation of agency contracts, the authority of persons acting as
agents, rights and duties of agents and principles and the application of the law
of agency in businesses.
Subsequently, the law of Partnership (Part I and II) will be discussed. In contract
of partnership, you will learn about the liabilities of partners in a partnership, the
relationship between partners, the partnership property and the rules on
dissolution of partnership.
The course will also cover a discussion on the Law of Sale of Goods (Part I and
II). In contract of sale of goods, you will learn the meaning of goods and the
implied terms in the contract of sale of goods, product liability and transfer of
title, and performance of contract and remedies available for breach.
Finally, the discussion will focus on the Law of Hire-Purchase. The discussion
covers the formation of the hire-purchase contract, the statutory rights of the
hirer, the rules of repossession of goods by the owner and other important matter
like insurance of the goods under a hire-purchase contract.

COURSE GUIDE  xiii
Aim of the Course

The course aims to give the basic knowledge of business law to the students in
business course. It helps the students to understand the principles of law
applicable to business and this knowledge will help them to develop the
necessary skills in pre-contractual negotiations in their related professions and
expose them to important aspects of law that may affect their rights and liabilities
when involve in business transactions. This course will examine how the law
operates to ensure fairness and efficiency in the conduct of business and students
will study the relations between various principles of business law, case studies
and learn how to apply legal rules to emerging problems.
Course Learning Outcomes

On successful completion of this course, students are expected to:-
1. Demonstrate knowledge of the various branches of law applicable to
business.
2. Determine the legal issues that arise in business transactions and apply
fundamental principles of business law.
3. Analyse legal trends and assess their importance for business strategy.
HOW CAN YOU GET THE MOST FROM THIS COURSE?

Much of what we discuss here is not too difficult if you put some thought into
your study of it. One way to enhance your understanding of the course is to read
many articles and cases on law from the reported journals in Malaysia and other
countries, like the Malayan Law Journal, the Current Law Journal, the All
England Report, the KingÊs Bench, the QueenÊs Bench, etc.
Learning Package
In this Learning Package you are provided with THREE kinds of course materials:
1. The Course Guide you are currently reading
2. The Course Content (consisting of 14 topics) and
3. The Course Assignment Guide (which describes the assignments to be
submitted and the examinations you have to sit for) will be given to you in
a separate folder.
Please ensure that you have all these materials.

xiv  COURSE GUIDE
Mind Map
A basic knowledge on Business Law is considered relevant for every business
student and will assist them in handling their job assignments successfully. An
overview of the course and a description of the contents are provided below.
Figure 1: Overview of the Course

COURSE GUIDE  xv
Table of Content
Topic 1 Law of Contract (Proposal and Acceptance)
Topic 2 Law of Contract (Consideration)
Topic 3 Law of Contract (Intention to Create Legal Relations)
Topic 4 Law of Contract (Capacity to Contract)
Topic 5 Law of Contract (Free Consent to Contract)
Topic 6 Law of Contract (Void and Illegal Contract)
Topic 7 Law of Contract (Discharge of Contract and Remedies)
Topic 8 Law of Agency (Part I)
Topic 9 Law of Agency (Part II)
Topic 10 Law of Partnership (Part I)
Topic 11 Law of Partnership (Part II)
Topic 12 Law of Sale of Goods (Part I)
Topic 13 Law of Sale of Goods (Part II)
Topic 14 Law of Hire-Purchase
Course Content
This course consists of 14 topics altogether.
Topic 1: Introduces the law which governs the formation of contracts in

Malaysia. Along the discussion, the relevant provisions of the
statute and the case-laws will be referred to in order to give us a
clear understanding of the topic.
Topic 2: Discusses the importance of consideration in a contract, without

which a contract will be void.
Topic 3: Discusses the requirement of intention in order to create legal

relation and bind the parties in a contract.
Topic 4: Discusses the need for the parties to have the capacity before
entering into a valid contract.
Topic 5: Discusses the importance of free consent by the parties to a

contract, so much so that the partiesÊ consent must not be vitiated

xvi  COURSE GUIDE
by any act of coercion, undue influence, fraud, misrepresentation,

and mistakes.
Topic 6: Discusses the circumstances under which contracts may become

illegal contracts and therefore void.
Topic 7: Discusses the various ways in which contracts will be discharged

and the parties will be free from their obligations. Remedies
available to the parties are also discussed in this topic.
Topic 8: Discusses the meaning of agency, the purpose of agency contract,

the types of agency contract, the statutory requirement for
creation of agency contract and the scope of authority of the agent.
Topic 9: Discusses duties of agents and principals, the rights of agents and
principals, the effect of agency contract, and the rules of
termination of agency contract.
Topic 10: Discusses the important characteristics of partnership, the rules on

formation of partnership, the relations of partners to outsiders and
the liabilities of partners to third parties.
Topic 11: Discusses the rights, duties and liabilities of partners, the
obligations of partners to one another, the rules on partnership
property, the grounds for dissolution of partnership and the
consequences of dissolution of partnership.
Topic 12: Discusses the meaning of goods, the classification of goods, the
implied terms in a contract of sale of goods and the importance of
transfer of property in the goods.
Topic 13: Discusses the rule of nemo dat quod non habet and its exceptions,
the effect of sale by a person other than the owner, the rules
relating to the performance of contract of sale and the remedies
available to the seller and buyer for breach of contract of sale of
goods.
Topic 14: Discusses the formation and nature of hire-purchase agreement,

the important terms in hire-purchase agreement, the rights and
liabilities of owner and hirer and the procedure for repossession of
goods under hire-purchase agreement.

COURSE GUIDE  xvii
Organisation of Course Content

In distance learning, the module replaces the university lecturer. This is one of
the main advantages of distance learning where specially designed materials
allow you to study at your own pace, anywhere and at anytime. Think of it as
reading the lecture instead of listening to a lecturer. In the same way that a
lecturer might assign something for you to read or do, the module tells you what
to read, when to read and when to do the activities. Just as a lecturer might ask
you questions in class, your module provides exercises for you to do at
appropriate points.
To help you read and understand the individual topics, numerous realistic
examples support all definitions, concepts and theories. Diagrams and text are
combined into a visually appealing, easy-to-read module. Throughout the course
content, diagrams, illustrations, tables and charts are used to reinforce important
points and simplify the more complex concepts. The module has adopted the
following features in each topic:
ACTIVITY
These are situations drawn from situations to show how knowledge of
the principles of learning may be applied to real-world situations. The
activities illustrate key points and concepts dealt with in each chapter.
SELF-CHECK
Questions are interspersed at strategic points in the chapter to

encourage review of what you have just read and retention of recently
learned material. The answers to these questions are found in the
paragraphs before the questions. This is to test immediately whether
you understand the few paragraphs of text you have read. Working
through these tests will help you determine whether you understand
the chapter and prepare you for the assignments and the examination.
The main ideas of each topic are listed in brief sentences to provide a review of
the content. You should ensure that you understand every statement listed. If
you do not, go back to the topic and find out what you do not know.

xviii  COURSE GUIDE
Key terms discussed in the topics are placed at the end of each topic to make you
aware of the main ideas. If you are unable to explain these terms, you should go
back to the topic to clarify.
At the end of each topic, a list of articles and topics of books is provided that is
directly related to the contents of the topic. As far as possible, the articles and
books suggested for further reading will be available in OUMÊs Digital Library
which you can access and OUMÊs Library. Also, relevant Internet resources are
available to enhance your understanding of selected curriculum concepts and
principles as applied in real-world situations.

COURSE GUIDE  xix
Assessment Format
Please refer to myVLE.
WHAT SUPPORT WILL YOU GET IN STUDYING THIS

COURSE?
Seminars
There are 15 hours of seminars or face-to-face interaction supporting the course.
These consist of FIVE seminar sessions of three hours each. You will be notified
of the dates, times and location of these seminars, together with the name and
phone number of your facilitator, as soon as you are allocated in a seminar
group.
MyVLE Online Discussion

Besides the face-to-face seminar sessions, you have the support of online
discussions. You should interact with other students and your facilitator using
myVLE. Your contributions to the online discussion will greatly enhance your
understanding of course content, how to go about doing the assignments and
preparation for the examination.
Facilitator
Your facilitator will mark your assignments. Do not hesitate to discuss during the
seminar session or online if:
• You do not understand any part of the course content or the assigned
readings
• You have difficulty with the self-tests and activities
• You have a question or problem with the assignments.
Library Resources
The Digital Library has a large collection of books, journals, thesis, news and
references which you can access using your student ID.

xx  COURSE GUIDE
Learner Connexxions
This is an online bulletin which provides interesting and relevant information to
help you along the programme. There are many useful study hints and you can
read about the experiences of other distant learners.
HOW SHOULD YOU STUDY FOR THIS COURSE?

1. Time Commitment for Studying
You should plan to spend about six to eight hours per topic, reading the
notes, doing the self-tests and activities and referring to the suggested
readings. You must schedule your time to discuss online. It is often more
convenient for you to distribute the hours over a number of days rather
than spend one whole day per week on study. Some topics may require
more work than others, although on average, it is suggested that you spend
approximately three days per topic.
2. Proposed Study Strategy

The following is a proposed strategy for working through the course. If you
run into any trouble, discuss it with your facilitator either online or during
the seminar sessions. Remember, the facilitator is there to help you.
(a) The most important step is to read the contents of this Course Guide
thoroughly.
(b) Organise a study schedule. Note the time you are expected to spend
on each topic and the date for submission of assignments as well as
seminar and examination dates. These are stated in your Course
Assessment Guide. Put all this information in one place, such as your
diary or a wall calendar. Whatever method you choose to use, you
should decide on and jot down your own dates for working on each
topic. You have some flexibility as there are 14 topics spread over a
period of 14 weeks.
(c) Once you have created your own study schedule, make every effort to
Âstick to itÊ. The main reason students are unable to cope is because
they get behind in their coursework.
(d) To begin reading a topic:
• Remember in distance learning much of your time will be spent on
READING the course content. Study the list of topics given at the
beginning of each topic and examine the relationship of the topic
to the other thirteen topics.
• Read the topic overview showing the headings and subheadings
to get a broad picture of the topic.
COURSE GUIDE  xxi
• Read the topic learning outcomes (what is expected of you). Do

you already know some of the things to be discussed? What are
the things you do not know?
• Read the introduction (see how it is connected with the previous
topic).
• Work through the topic. (The contents of the topic has been
arranged to provide a sequence for you to follow).
• As you work through the topic you will be asked to do the self-test
at appropriate points in the topic. This is to find out if you
understand what you have just read.
• Do the activities (to see if you can apply the concepts learned to
real-world situations).
(f) When you have completed the topic, review the learning outcomes to
confirm that you have achieved them and are able to do what is
required.
(g) If you are confident, you can proceed to the next topic. Proceed topic
by topic through the course and try to pace your study so that you
keep yourself on schedule.
(h) After completing all topics, review the course and prepare yourself for
the final examination. Check that you have achieved all topic learning
outcomes and the course objectives (listed in this Course Guide).
FINAL REMARKS
Once again, welcome to the course. To maximise your gain from this course, you
should try at all times to relate what you have studied to the real world. Look at
the environment in your institution and ask yourself whether the ideas discussed
can be applied. Most of the ideas, concepts and principles you learn in this course
have practical applications. It is important to realise that much of what we do in
education and training has to be based on sound theoretical foundations. The
contents of this course provide the principles and theories explaining human
learning, whether it be in a school, college, university or training organisation.
We wish you success with the course and hope that you will find it interesting,
useful and relevant in your development as a professional. We hope you will
enjoy your experience with OUM and we would like to end with a saying by
Confucius – „Education without thinking is labour lost‰.

COURSE ASSIGNMENT
GUIDE

xxiv  COURSE ASSIGNMENT GUIDE

COURSE ASSIGNMENT GUIDE  xxv
Table of Contents
Introduction xxvi
Academic Writing xxv

(a) Plagiarism?
(b) Documenting Sources
(i) What is Plagiarism?
(ii) How Can I Avoid Plagiarism?
• Direct Citation
• Indirect Citation
• Third-party Citation
(c) Referencing
• Journal Articles
• Online Journal
• Webpage
• Book
• Article in Book
• Printed Newspaper
Details about Assignments xxviii

xxvi  COURSE ASSIGNMENT GUIDE
INTRODUCTION
This guide explains the basis on which you will be assessed in this course during
the semester. It contains details of the facilitator-marked assignments, and final
examination of the course.
One element in the assessment strategy of the course is that all students should
have the same information as facilitators about the answers to be assessed.
Therefore, this guide also contains the marking criteria that facilitators will use in
assessing your work.
Please read through the whole guide at the beginning of the course.
ACADEMIC WRITING
(a) Plagiarism
(i) What Is Plagiarism?
Any written assignment (essays, project, take-home exams, etc)
submitted by a student must not be deceptive regarding the abilities,
knowledge or amount of work contributed by the student. There are
many ways that this rule can be violated. Among them are:
Paraphrases A closely reasoned argument of an author is paraphrased but

the student does not acknowledge doing so. (Clearly, all our
knowledge is derived from somewhere, but detailed arguments
from clearly identifiable sources must be acknowledged.)
Outright Large sections of the paper are simply copied from other
plagiarism sources, and the copied parts are not acknowledged as
quotations.
Other These often include essays written by other students or sold by
sources unscrupulous organisations. Quoting from such papers is
perfectly legitimate if quotation marks are used and the source
is cited.
Works by Taking credit deliberately or not deliberately for works
others produced by others without giving proper acknowledgement.
These works include photographs, charts, graphs, drawings,
statistics, video clips, audio clips, verbal exchanges such as
interviews or lectures, performances on television and texts
printed on the Web.
Duplication The student submits the same essay for two or more courses.

COURSE ASSIGNMENT GUIDE  xxvii
(ii) How Can I Avoid Plagiarism?

• Insert quotation marks around Âcopy and pasteÊ clause, phrase,
sentence, paragraph and cite the original source.
• Paraphrase clause, phrase, sentence or paragraph in your own
words and cite your source.
• Adhere to the APA (American Psychological Association) stylistic
format, whichever applicable, when citing a source and when
writing out the bibliography or reference page.
• Attempt to write independently without being overly dependent
on information from anotherÊs original works.
• Educate yourself on what may be considered as common
knowledge (no copyright necessary), public domain (copyright
has expired or not protected under copyright law), or copyright
(legally protected).
(b) Documenting Sources

Whenever you quote, paraphrase, summarise, or otherwise refer to the
work of another, you are required to cite its original source of
documentation. Offered here are some of the most commonly cited forms of
material :
 Direct Citation Simply having a thinking skill is no assurance

that children will use it. In order for such skills to
become part of day-to-day behaviour, they must
be cultivated in an environment that value and
sustains them. „Just as childrenÊs musical skills
will likely lay fallow in an environment that
doesnÊt encourage music, learnerÊs thinking skills
tend to languish in a culture that doesnÊt
encourage thinking‰ (Tishman, Perkins and Jay,
1995, p.5)
 Indirect Citation According to Wurman (1988), the new disease of

the 21st century will be information anxiety,
which has been defined as the ever-widening gap
between what one understands and what one
thinks that one should understand.

xxviii  COURSE ASSIGNMENT GUIDE
(c) Referencing
All sources that you cite in your paper should be listed in the Reference
section at the end of your paper. HereÊs how you should do your Reference.
Journal Article Rozanah Ab Rahman and Kamal Halili Hassan. (2008).

Regulating High-Risk Activities in Construction
Industry in Malaysia: The Need For Legal Protection.
Jurnal Undang-Undang dan Masyarakat, 12:246-258.
Online Journal Evnine, S. J. (2001). The universality of logic: On the
connection between rationality and logical ability
[Electronic version]. Mind, 110, 335-367.
Webpage National Park Service. (2003, February 11). Abraham
Lincoln Birthplace National Historic Site. Retrieved
February 13, 2003, from http://www.nps.gov/abli/
Book Harlina Mohamed On and Rozanah Ab Rahman. (2007).
Undang-Undang Perniagaan Malaysia. Kumpulan
Usahawan Muslim Sdn. Bhd.
Article in a Book Rozanah Ab Rahman. (2008). Duty of Safety and Health
Officers in Prevention of Accidents at the Workplace In
:(Ed., Azmawani Abd Rahman, Noor Azman Ali and
Han Chun Kwong), Management Research Issues.
UPM, Press. Pp. 53-64.
Printed Holden, S. (1998, May 16). Frank Sinatra dies at 82:
Newspaper Matchless stylist of pop. The New York Times, pp. A1,
A22-A23.
DETAILS ABOUT ASSIGNMENT

Facilitator-Marked Assignment (FMA)
You must be able to complete the assignment from the information and materials
contained in your suggested readings and course content. However, it is
desirable in graduate level education that you are able to demonstrate that you
have read and researched more widely than the required minimum. Using other
references will give you a broader perspective and may provide a deeper
understanding of the subject. When you have completed the assignment, submit
it together with a FMA form to your facilitator. Make sure that your assignment
reaches the facilitator on or before the deadline.

COURSE ASSIGNMENT GUIDE  xxix
General Criteria for Assessment of FMA

In general, your facilitator will expect you to write clearly, using correct spelling
(please use your spell checker) and grammar. Your facilitator will look for the
following criteria :
• You have critically thought about issues raised in the course.
• You have considered and appreciated different points of view, including
those in the course.
• You have given your own views and opinions.
• You have stated your arguments clearly with supporting evidence and
proper referencing of sources.
• You have drawn on your own experiences.

Topic X Law of
Contract
1 (Proposal and
Acceptance)
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define the meaning of contract;
2. Explain the important elements that constitute a valid contract;
3. Differentiate between a proposal and an invitation to treat;
4. Identify the rules of acceptance and the exceptions;
5. Describe the importance of communication in a proposal and an
acceptance; and
6. Discuss the principles relating to revocation of a proposal and an
acceptance.
X INTRODUCTION
This topic introduces the law which governs the formation of contracts in Malaysia.
Along the discussion, the relevant provisions of the statute, in particular the
Contracts Act 1950 and the case-laws will be referred to, in order to give us a clear
understanding of the topic. In Malaysia, our law of contract is basically governed
and enforced by the Contracts Act 1950. However, the Act does not address all
aspects of the law of contract. Thus, in absence of any provision relating to issue
arises under the contract, reference may be made to the English law by virtue of
Section 5 of the Civil Law Act, 1956. It is important to note that though reference is
made to the English Law, it will only be applicable as guidance or persuasive
authority and will not bind the decisions of the courts in Malaysia. There are times,
decisions of the courts in India may be referred to since some of the provisions of the
Indian Contracts Act are in pari materia with our Malaysian Contracts Act.
However, it will be regarded as a source of reference only.
2 X TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)
1.1 DEFINITION OF CONTRACT AND

ELEMENTS OF A VALID CONTRACT
Section 2(h) of the Contracts Act defines contract as an agreement enforceable by law.
In other words, a contract is an agreement that binds the parties who enter into it and
it can be enforced against one another (Refer to Figure 1.1). It can be a contract to sell
and purchase of land, a contract of leasing, insurance contract, etc. However, not all
agreements are contracts. For instance, a social agreement or agreements between
family members. (It is also known as Âdomestic agreementÊ). These agreements are not
considered as contracts because the formations are not intended to bind the parties in
law.
Figure 1.1: A sample of a contract

Most of the everyday contracts take a form of simple contracts in which there are
no specific formalities involved in the contract formation. The contracts are made
orally or through implied actions of the parties. For example, selling and buying
goods at the grocery shop or the market.
However, there are contracts which are considered as complex in nature, like contracts
entered into by the companies doing business of selling houses and lands and joint-
venture contracts. These contracts are normally drafted and prepared in a written
form, containing the details of the terms and conditions agreed by the parties therein.
In order to form an agreement enforceable by law, the following elements (Refer to

Figure 1.2) must exist:
(a) Proposal or Offer

(b) Acceptance
(c) Consideration
(d) Intention to create legal relations
(e) Capacity to contract
(f) Free consent

TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) W 3
Figure 1.2: Elements of a valid contract

Table 1.1 = Explanation for elements of a contract
Elements of contract Explanation

Proposal or Offer When you signify your willingness to be bound by a
contract with the other party.
Acceptance When you agree to accept the offer or proposal made by
the other party who makes the proposal.
Proposer/Offeror A person who makes the offer.
Acceptor A person who accepts the offer.
Consideration A value to be paid for a promise made.
Intention to create legal Every party to a contract must have the intention to create
relations a legal relation.
Capacity to contract Every party to a contract must have the capacity to enter
into a contract.
Free Consent Every party must enter into a contract with free consent
and not secured through means of fraud, coercion, undue
influence, misrepresentation or mistake.

SELF-CHECK 1.1
1. How do you distinguish between a mere social agreement and
a contract?
2. What are the important elements to form a valid contract?
3. What are the advantages of having a contract in a written form?
4. Give two examples of standard form of contract that are
available in Malaysia.
1.2 PROPOSAL OR OFFER

What is a proposal or an offer? According to Section 2(a) of the Contracts Act
1950, as explained in Table 1.1, a proposal is said to exist Âwhen one person
signifies to another, his willingness to do or to abstain from doing anything, with
a view to obtain the assent of that other person to the act or the abstinenceÊ. In
other words, a proposal is the readiness of the person who makes the offer to
create a legal relation and to be bound by the law, whenever the terms of the
proposal are agreed upon by the acceptor. There is a difference in the use of
word under the Malaysian law and the English law though the meaning is
similar. Under the English law, the term offer is used while under the Malaysian
Contracts Act, the word proposal is used.
1.2.1 To Whom can the Proposal be Made?

A proposal can be made to a specific or particular person and the proposal can be
accepted by that person only. For example, A proposes B to sell his Perdana car
at RM100,000. The proposal of A can only be accepted by B and not by other
persons.
A proposal can also be made to the public. In such situation, the acceptance can
be made by any person who knows about the proposal and performs the
obligations required by the proposer. The example of a proposal made to the
public is illustrated in the case of:

Carlill v. Carbolic Smoke Ball Co Ltd (1893) 1 QB 256.
The defendants were proprietors of a medical preparation called ÂThe Carbolic

Smoke BallÊ. They inserted advertisements in various newspapers in which
they offered to pay £100 to any person who contracted influenza after using
the ball three times a day for two weeks. They added that they had deposited
£1,000 at the Alliance Bank, Regent Street Âto show our sincerity in the matterÊ.
The claimant, a lady, used the ball as advertised, and was attacked by
influenze during the course of treatment. She now sued for £100 as promised
in the advertisements. The defendants tried to avoid liability by saying that
there was no offer made because the offer was too vague and not sure to
whom it was made.
Held: The Court rejected the argument and held that the advertisement was
an offer to the whole world. It was not an attempt to contract with the whole
world but with the portion of the public who came forward and performed
the condition in the advertisement . Thus, it was possible to make an offer of
this kind and there was a binding contract made between Mrs Carlill and the
defendants.
1.2.2 The Difference between a Proposal and an

Invitation to Treat
Usually, before a proposal is made, the parties will hold some negotiations. The
negotiation is an invitation to call for a proposal. There are many examples of
invitation to treat, like auctions and display of goods on the shelves in shops.
The display of goods on the shelves in shops is also an invitation to treat and not
a proposal by the shopkeeper. The proposal comes from the buyers when the
buyers take the goods from the shelves and bring it to the counter for payment.
The acceptance takes place when the seller accepts the payment from the buyer.
In short, the contract was formed at the payment counter. A relevant case to
explain the above principle is the case of:

Pharmaceutical Society of Great Britain v. Boots Cash Chemist (Southern)

Ltd (1953) 1 QB 401.
The defendants were charged under the Pharmacy and Poison Act 1933 (UK)
which provided that it was unlawful to sell certain poison unless such sale
was supervised by a registered pharmacist. Every sale of the drugs on the
Poison List was supervised at the cash desk by a qualified pharmacist, who
had authority to prevent customers from taking goods out of the shop if he
thought fit. In this case, a question arises whether a sale had occurred in the
self-service shop when the customer selected articles which he desired to
purchase and placed them in the wire basket.
The Court held: The display of goods did not constitute an offer but only an
invitation to treat. A proposal to buy was made when the customer placed
the articles in the basket. Hence, the contract of sale would be made at the
cashierÊs desk when the cashier accepted the customerÊs offer to buy what
had been chosen. By that principle, the defendants (shop owners) had not
made an unlawful sale.
In an auction, the auctioneer makes the invitation to the bidders who come to the
public auction to make a proposal. The proposal to bid at a certain price will
come from the bidders and the auctioneer will accept or reject the proposal.
Usually, the auctioneer will accept the highest bid or proposal from the bidders.
An advertisement is also an invitation to treat by the advertiser. For example,

advertisement for jobs in the newspapers.
In the case of Coelho v. The Public Services Commission [1964] MLJ 12, the
High Court ruled that: the newspaper advertisement was an invitation to
qualified persons to apply and the applications were offers.
However, if the advertisement shows the willingness of the advertiser to do or to

abstain from doing something, such advertisement is not an invitation to treat
but a proposal by the advertiser. In this case, anyone who comes to perform the
terms as required in the advertisement is said to have accepted the proposal. You
can refer to the above case of Carlill which affirms the rule that the advertisement
was an offer to the whole world and the company has the intention to contract
with the portion of the public who came forward and performed the condition in
the advertisement.

1.2.3 Proposal Must be Clear and Communicated

In the Contracts Act 1950, Section 4(1) provides that „the communication of a
proposal is complete when the proposal comes to the knowledge of the
proposer.‰ In order to make the proposal effective, it must be clear and
communicated. A proposal which is vague and uncertain may not lead to a
binding contract.
In the case of Ahmad Meah & Anor. v. Nacodah Merican (1890) 4 Ky 583, an
agreement to build Âa suitable houseÊ was held by the court as vague to
create a binding contract.
A proposal must also be communicated to the acceptor. It can be communicated

in whatever form, either orally or in written or through the implied action of the
party. Logically, a person cannot accept a proposal which he does not know
exist. Thus, a person who gives any information cannot claim for a reward if he
does not know about the reward being offered. The relevant case to explain this
principle is the case of:
Williams v. Carwardine (1883) 5C&P 566.
The defendant published a handbill with the promise that he would pay the
sum of £20 to any person who should give information leading to the
discovery of the murderer of Walter Carwardine. The claimant in this case,
lived with Williams and was severely beaten by him. Believing that she was
going to die and to ease her conscience, she gave information leading to the
conviction of Williams for the murder. In an action to recover the reward, the
jury found that the claimant was not induced to give the information by the
reward offered, but by motives of revenge.
However, the Court held: She was entitled to the reward because she had
seen the handbill and had given information.
1.2.4 Revocation of Proposal

The proposer may revoke his proposal at any time before acceptance. Under
Section 5(1) of the Contracts Act 1950, „a proposal may be revoked at any time

before the communication of its acceptance is complete as against the proposer,

but not afterwards.‰
The question is: When is the communication of acceptance complete as against

the proposer?
If the acceptance is made through instantaneous communication like telephone,

telex, fax or oral, the acceptance is said to be communicated once it comes to the
knowledge of the proposer. But, if the acceptance is made by post or telegram,
the acceptance is complete as against the proposer at the time when the letter of
acceptance is posted. Thus, in such situation, the revocation of the proposal must
be made by the proposer before the letter of acceptance is posted by the acceptor.
For example:
A proposes, by a letter, sent by post, to sell his house to B.

B accepts the proposal by a letter sent by post.
A may revoke his proposal at any time before or at the moment when B
posts his letter of acceptance, but not afterwards.
Next, Section 6 provides that a proposal is revoked:
(a) When the proposer communicated the revocation of the proposal to the
other party before its acceptance.
If the revocation of proposal is made by post, the revocation is only
effective when it comes to the knowledge of the acceptor, and not at the
time when the letter of revocation is posted. One relevant case to illustrate
the principle is the case of:

Byrne v. Tienhoven (1880) 5 C.P.D. 344
1 October: Defendant posted letter of offer in Cardiff to the plaintiff in New

York.
8 October: Defendant posted a letter revoking the offer made on October 1.
11 October: Plaintiff received the letter of offer posted on October 1 and sent
acceptance by telegram the same day.
15 October: Plaintiff sent letter of acceptance.
20 October: Plaintiff received defendantÊs letter of revocation.
The court held: There was a contract between the parties because the
revocation of the offer posted on 8 October was only effective on 20 October
(when the plaintiff received it). The plaintiff had accepted the offer on 11
October (when he sent the telegram accepting the offer).
The revocation of proposal need not be communicated by the proposer. It can be

communicated by a third party who is acting on behalf of the proposer as an
agent. For example, in the case of:
Dickinson v Dodds (1876) 2 Ch D 468
The defendant offered to sell houses by letter stating: „This offer to be left
over until Friday, 9 a.m.‰
On Thursday afternoon, Mr Berry informed the claimant that the defendant

had been negotiating a sale of the property with Allan.
On Thursday evening, the claimant left a letter of acceptance at the

defendantÊs house but the letter was not delivered to the defendant.
On Friday morning, at 7 a.m. Berry (acting as the claimantÊs agent) handed

the defendant a duplicate letter of acceptance.
However, on Thursday, the defendant had entered into a contract to sell the
property to Allan.
The court held: The defendant was free to revoke his offer at any time
because there was no consideration given by the claimant for the promise, to
keep the offer open. Further, BerryÊs communication indicated that Dodds
(defendant) was no longer interested to sell the property to the claimant. This
was a good communication of DoddsÊs revocation of offer. Therefore, there
(b) By the lapse of time prescribed in the proposal for its acceptance. If no time
is prescribed, by the lapse of a reasonable time.
An example of case to illustrate the principle is:
Ramsgate Victoria Hotel Co. v. Montefiore (1866) L.R. 1 Ex.Ch. 109
The defendant offered to take shares in the company by a letter dated 8

June 1864. The company did not reply until 23 November 1864, when it
alloted shares to the defendant. The defendant refused to take up the
shares.
Held: The defendantÊs refusal was justified because the offer had lapsed
due to the companyÊs delay in accepting the offer within a reasonable
time. The period between June and November was not reasonable.
(c) Where the acceptor fails to fulfil a condition precedent to acceptance.

For example, an employer offers to employ an applicant on the condition
that he passes certain tests. If the applicant fails the test, then the proposal is
revoked.
(d) By the death or mental disorder of the proposer.

It is important that the acceptor knows about the fact of the death or mental
disorder of the proposer. If the acceptance is made without the knowledge
of the death or mental disorder of the proposer, then it is a good
acceptance.
SELF-CHECK 1.2
1. Can a proposal be made to the public at large?

2. How do you distinguish between a proposal and an invitation
to treat?
3. Must the acceptor know about the proposal before he can
accept it?
4. Can the proposer revoke his proposal?
5. When is the revocation of proposal become effective in cases
of revocation made by post?
6. What are the grounds for revocation of a proposal?

ACTIVITY 1.1
Discuss the following problem by applying the principle of law on
proposal:
(a) Browny made an offer of RM1,000.00 in ÂLooking TimesÊ to
anyone who returned his Persian cat. Tony, a friend of Browny,
found the Persian cat which he knew belonged to Browny. When
Tony returned the Persian cat to Browny, Browny was so excited
that he forgotten all about the offer he had made. The next day,
Tony came across the offer advertisement in Looking Times and
when he went to see Browny to claim for the reward, Browny
refused to pay. Advise Tony.
1.3 ACCEPTANCE
What is an acceptance? According to Section 2(b) of the Contracts Act 1950,
„when the person to whom the proposal is made signifies his assent thereto, a
proposal is said to be accepted: a proposal, when accepted becomes a promise.‰
This means, an acceptance is an agreement by the acceptor to the terms contained
in the proposal made by the proposer. With that acceptance, a binding contract is
said to exist.
It is important that there is a positive act of acceptance made by the acceptor. If

the acceptor keeps silence or fails to respond or totally disregards the proposal,
then there is no acceptance because there is no positive act made by the acceptor.
To determine whether an acceptance exists, the important rules on acceptance
will be discussed below.
1.3.1 Acceptance must be Absolute and Unqualified

Section 7(a), Contracts Act 1950 provides that „an acceptance must be absolute
and unqualified.‰ This means, the acceptance must be made on the same terms
as provided in the proposal and there must not be any variation or modification.
If the party varies or modifies the terms made in the proposal, an acceptance
does not exist but that act will amount to a counter-proposal. The case to
illustrate the rule is the case of:

Hyde v. Wrench (1840) 3 Beav. 334
The defendant offered to sell his estate to the plaintiff for £1,000. In reply, the
plaintiff made a counter-proposal to purchase at £950 but the defendant
refused to accept this proposal. The plaintiff then wrote again to the
defendant, agreeing to accept the original proposal, but the defendant refused
to sell.
The court ruled: The counter-offer made by the plaintiff at the price of £950
constituted a rejection to the original proposal (which cannot be revived).
Therefore, no acceptance had occurred and the defendant had the right not to
sell the estate to the plaintiff.
Next, if the parties are still in the process of negotiation, there is no question of an
agreement. An example is the case of:
Lau Brothers & Co. v. China Pacific Navigation Co. Ltd. [1965] 1 MLJ 1
The parties in this case conducted negotiations for the delivery of logs,
through a series of telegrams and letters. Finally, the defendants withdrew
from the negotiations. The issue was whether there was a binding contract
between the parties?
The court held: The parties were still in a state of negotiations and the
defendants had the right to withdraw from it.
Another situation where a contract is not yet concluded is when there is a

conditional acceptance. It happens when the acceptance is qualified by the term
„subject to a contract‰ or „subject to a formal contract being drawn up by the
solicitors.‰ This means, the parties do not intend to conclude their bargain until
they executed a formal contract. The example of case is:

Low Kar Yit & Ors. v. Mohd Isa & Anor [1963] MLJ 165
The defendants gave an option to the plaintiffsÊ agent to purchase a parcel of

land subject to, a formal contract being drawn up and agreed upon by the
parties. The plaintiffsÊ agent exercised the option but the defendant failed to
sign the sale agreement. The plaintiff then brought a legal action for breach of
contract.
The court decided that: there was no binding contract because the option to
purchase was conditional and subject to „a formal contract to be drawn up
and agreed upon‰ by the parties. Thus, the exercise of the option has no legal
effect and it was an agreement to enter into an agreement.
1.3.2 Acceptance must be Communicated

In order to form a binding contract between the parties, the acceptance of the
proposal must be communicated to the proposer. Section 7(b), Contracts Act 1950
provides that „the acceptance may be expressed in some usual and reasonable
manner, unless the proposal prescribes a manner in which it is to be accepted. If
the proposal prescribes a manner in which it is to be accepted, and the
acceptance is not made in such manner, the proposer may, within a reasonable
time after the acceptance is communicated to him, insist that his proposal shall
be accepted in the prescribed manner, and not otherwise; but if he fails to do so,
he accepts the acceptance.‰
The principle provided in Section 7(b) means, if no method of acceptance is

specified by the proposer, then the acceptance must be communicated and made
in a usual and reasonable manner. For instance, if A offers to sell his bicycle to B,
who stays next door to A, then the reasonable manner to accept the offer is by B
going to AÊs house to give his acceptance. If B wants to send a letter to accept AÊs
offer, the manner may be usual but it is unreasonable since they are staying next
door.
But if the proposal specifies a particular mode of acceptance and the acceptor
does not follow it, then the proposer can insist on the mode of acceptance. The
proposer must act within reasonable time after the acceptance is communicated.
If not, then the proposer is said to have accepted the acceptance.
(a) Act of acceptance

In communicating the acceptance, it is not sufficient that the acceptor
intends to accept the proposal without doing some positive act that relates
to the proposal. Thus, if the acceptor remains silence after being proposed,

then the act of silence cannot constitute an acceptance. As what happened

in the case of:
Felthouse v. Bindley (1862) 11 CB (NS) 869
The plaintiff wrote to the defendant, offering to buy a horse for £30.75p.
and added as follows: „If I hear no more about him, I consider the horse
is mine at that price.‰ The defendant did not reply.
The court held that: There was no contract between the plaintiff and the
defendant because the defendant had never communicated his
acceptance to the plaintiff. Silence is no acceptance.
(b) Exceptions
It is clear that the general rule requires the communication of acceptance
and this means the acceptance must be brought to the notice of the
proposer.
However, there are certain exceptions to the general rule, as follows:
• Acceptance through post (Postal Rule)

If the parties have agreed to use the post as a means of communication,
then the acceptance is complete or effective as soon as the acceptor
posted his letter of acceptance, even though it never reaches the
proposer. Section 4(2) (a), Contracts Act 1950 provides that:
„The communication of an acceptance is complete:

(a) as against the proposer, when it is put in a course of transmission to
him, so as to be out of the power of the acceptor; and
(b) as against the acceptor, when it comes to the knowledge of the
proposer.‰
Paragraph (a) means, when the acceptor posts his letter of acceptance,
the proposer is bound to perform his obligation, even though the
proposer does not know about the acceptance (for instance, the letter
does not reach the proposer or delay in transit). A case to illustrate this
principle is:

Ignatius v. Bell (1913) 2 FMSLR 115

P
a The parties in this case agreed to use the post as a means of
r communication. The defendant made a proposal to sell his piece
a of land to the plaintiff and the option to purchase must be
g exercised on or before the 20 August 1912. The plaintiff sent his
r acceptance by registered post on 16 August 1912 but it was not
a delivered to the defendant till 25 August 1912.
p
h The court applying Section 4, held that: Communication of
acceptance was complete when the notice of acceptance was
posted on 16 August 1912, even though the defendant did not
know about the acceptance.
Paragraph (b) means, when the acceptor posts his letter of acceptance,
he is not bound to perform his obligation until his letter of acceptance is
received by the proposer. For example, if A proposes to sell his car to B
(by letter) and B accepts the proposal (also by letter), A is bound at the
time when B posts his letter of acceptance, but B himself is not bound
until A receives the letter of acceptance. It also means that in the
meantime, the acceptor may still withdraw his acceptance.
If the proposer wishes to exclude the postal rule, he may provide

protection for himself. For instance, the proposer may clearly state in his
proposal that any acceptance is only complete upon receipt.
• Acceptance through performance of an act stated in the proposal

In some cases, the acceptance need not be communicated to the
proposer. Section 8, Contracts Act 1950 provides that „performance of
the conditions of a proposal is an acceptance of the proposal.‰
In a unilateral contract (proposal to the public at large), the acceptor

need not communicate his acceptance to the proposer because when the
proposer performs the conditions provided in the proposal, it becomes
an acceptance. The situation is that, where a proposer advertises to the
public at large that a reward is being offered, it will be unreasonable for
every person who wants to accept the proposal to inform the proposer
of his intention to accept. Thus, performance is sufficient to constitute
an acceptance if that is the intention of the proposer. The example of
case is:

Carlill v. Carbolic Smoke Ball Co. [1893] 1 QB 256
The Court held that: Performance was sufficient to constitute

acceptance if that was the intention of the proposer.
(Explanation: Mr Carlill need not inform the company that she

accepted its offer. By using the product as advertised and meeting
all the terms of the offer, she is said to have accepted the offer).
1.3.3 Revocation of Acceptance

As explained earlier, when the acceptor posts his letter of acceptance, he is not
bound to perform his obligation until his letter of acceptance is received by the
proposer. This means the acceptor may still withdraw his acceptance. According
to Section 5(2), Contracts Act 1950, „an acceptance may be revoked at any time
before the communication of the acceptance is complete as against the acceptor,
but not afterwards.‰
For example:
A proposes (by a letter sent by post), to sell his house to B.
B accepts the proposal (by letter sent by post).
B may revoke his acceptance at any time (before or at the time when) his
letter of acceptance reaches A.
SELF-CHECK 1.3
7. What is the importance of an acceptance in a contract and what

is the effect of a counter-proposal?
8. How can the acceptor communicate his acceptance to the
proposer?
9. In an acceptance made by post, when is the communication of
acceptance complete as against the proposer?
10. Can the performance of an act stipulated in the proposal
amount to an acceptance?
11. When can the acceptor withdraw his acceptance?
12. What do you understand by the „postal rule‰ principle?

ACTIVITY 1.2
Discuss the following cases by applying the principle of law on

acceptance:
(a) On Friday 5 September, Hanna sent a telex to Adam offering to
buy his piano at RM3,000. The telex was received by Adam at 4
p.m. Since the telex operator had gone home for the weekend,
Adam posted a letter in the last post on Friday, accepting the
proposal. The letter reached Hanna at 1.30 p.m. on Monday, 8
September. Meanwhile, at 8.30 a.m. on 8 September, Hanna sent
a telex to Adam withdrawing her proposal. HannaÊs telex
reached Adam and was read by him immediately at 8.45 a.m. on
8 September. Adam sought after your advice. Advise Adam.
(b) T advertised his speed-boat in a newspaper for RM4,000. S wrote
offering to buy the speed-boat for RM3,500. T replied by return
of post stating that he would accept RM3,750. Having received
no reply from S, T wrote again saying he would accept his offer
at RM3,500. Advise T.
• Every contract is an agreement but not all agreements are contracts.

• An invitation to treat is not yet a proposal or an offer. It is an offer to make an
offer.
• A proposal can be made to an individual person or to the public at large.
• A proposal must come to the knowledge of the acceptor before he can accept
it.
• A proposal may be revoked at any time before acceptance.
• Revocation of proposal made by post is only effective when the acceptor
receives the letter of revocation of a proposal.
• An acceptance must be made on the same terms as provided in the proposal
without any variation or modification.
• An acceptance must be communicated to the proposer and made in usual and
reasonable manner.
• In postal rule, the acceptance is effective upon the posting of the letter by the
acceptor, even if the letter of acceptance never reaches the proposer.

• In unilateral contract, performance of the act stated in the proposal

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

• Pharmaceutical Society of Great Britain v. Boots Cash Chemist (Southern)

Ltd. (1953) 1 QB 401.
• Ramsgate Victoria Hotel Co. v. Montefiore (1866) L.R. 1 Ex.Ch. 109.
• Williams v. Carwardine (1883) 5C&P 566.

Topic X Law of
2 Contract
(Consideration)
LEARNING OUTCOMES
1. Identify the importance of consideration in contracts;
2. Explain the exceptions available to the rule of consideration;
3. Discuss the principle relating to the adequacy of consideration;
and
4. Compare the difference in principle of consideration under the
Malaysian law and the English law.
X INTRODUCTION
Consideration is another important element of a contract and any agreement
made without consideration is a void agreement. Section 26, Contracts Act 1950,
provides that „an agreement made without consideration is void‰. According to
Section 2(d), Contracts Act 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 of the promise.‰
It means, if the promisee (person accepting the proposal):

• Has done or abstained from doing; or
• Does or abstains from doing; or
• Promises to do or to abstain from doing,

TOPIC 2 LAW OF CONTRACT (CONSIDERATION) W 21
some acts according to the promisorÊs (person making the proposal) desire,
that act or abstinence or promise is called consideration.
Therefore, consideration is a price that you pay to buy the promise or act of the
other person.
For example, you lost your mobile phone while travelling on a train and you
offered a RM100 reward to anyone who found and returned the mobile phone to
you. Later, A found and returned the phone to you. In such a case, you promised
to pay RM100 and A paid the price for your promise by performing the act. Thus,
the act of returning the mobile phone to you is the consideration for the promise.
The case of Osman bin Abdul Ghani & Ors v. United Asian Bank Bhd [1987] 1
MLJ 27 is a case on consideration, where the court held that forbearance to sue
could be a valid consideration.
2.1 EXECUTORY, EXECUTED AND PAST

CONSIDERATION
Consideration can be classified as:
(i) executory;
(ii) executed and;
(iii) past consideration.
Consideration may be executory when one promise is made in return for another
promise. For example, you (Refer to Figure 2.1) agree to sell a fax machine to B
for RM2,000. Here, BÊs promise to pay RM2,000 is the consideration for your
promise to sell the fax machine, and your promise to sell the fax machine is the
consideration for BÊs promise to pay RM2,000. These are lawful consideration.
Promises which form the consideration for each other are called reciprocal
promise and every promise and sets of promises forming the consideration for
each other, is an agreement.
Next, consideration may be executed when one promise is made in return for the
performance of an act. For instance, you advertise a reward of RM100 to anyone
who finds and returns your lost watch. C finds and returns the watch to you in
response to the offer. CÊs consideration for your promise is executed. Only your
liability remains outstanding, that is to pay C the RM100 reward. Figure 2.1
demonstrates the difference between these two considerations.

22 X TOPIC 2 LAW OF CONTRACT (CONSIDERATION)
Figure 2.1: Executory and Executed Consideration
Apart from the executory and executed consideration, if a promise is made in

return for an act that has already been performed, that act is regarded as past
consideration. For example, D found and returned your lost chain, and in
gratitude, you promise to reward D RM100. Your promise to reward D is made
in return for DÊs consideration that is past.
Under the English law, past consideration will not support a claim in contract
because the act which was performed before the promise of reward was made, is
regarded as gratuitous. However, under the Malaysian Contracts Act 1950, past
consideration is sufficient to support a promise because Section 2(d) and Section
26 (b) apply to past consideration. The words „has done or abstained from
doing‰ referred to an act which has been performed before the promise is made.
Thus, the position in Malaysia is that, even though the consideration is past, it is
valid if it is done „at the desire of the promisor.‰

The Malaysian case which applied the principle of past consideration is the case of:
Kepong Prospecting Ltd. & S.K. Jagatheesan & Ors v. A.E. Schmidt &
Marjorie Schmidt [1968] 1 MLJ 170
Schmidt, a consulting engineer, had assisted another in obtaining a

prospecting permit for mining iron ore in the State of Johore. He also helped
in the formation of the company (Kepong Prospecting Ltd.) and was
appointed as the Managing Director. Subsequently, Schmidt entered into an
agreement with the company. In the agreement, the company agreed to pay
him one per cent of the value of all ore sold from the mining land. This was
„in consideration of the services rendered by Schmidt on behalf of the
company before its formation, after incorporation and for future services....‰
Later, an issue arose in this case, whether the services rendered by Schmidt
after the incorporation of the company but before the agreement was made,
were sufficient to constitute a valid consideration, even though they were
past.
The Privy Council ruled that: it was a valid consideration and Schmidt was
entitled to claim the amount.
SELF-CHECK 2.1
(a) What are the differences between executed, executory and past
consideration?
(b) Can past consideration support a claim in contract?

ACTIVITY 2.1
consideration:
(a) Intan and Berlian were neighbours. Intan had to go abroad for business
arrangements and before she left, she told Berlian, „Please look after
my house.‰ After four weeks of Intan was away abroad, IntanÊs house
was caught by fire and Berlian could only save IntanÊs wedding album.
When Intan returned home, she thanked Berlian for saving her
wedding album which she treasured so much and promised Berlian
that she would pay RM100 for what Berlian had done. Now Intan
refused to pay what she has promised. Advise Berlian.
2.2 EXCEPTIONS TO THE RULE OF

CONSIDERATION
The general rule of consideration under Section 26, Contracts Act 1950, provides
that an agreement without consideration is void. However, there are exceptions
to this general rule. With these exceptions, even though the agreement is made
without consideration, the agreement is still valid and will be enforceable. The
exceptions include the following:
2.2.1 Agreement made on account of Natural Love

and Affection
This exception is provided in Section 26(a), Contracts Act 1950. The rule provides
that any agreement which is made without consideration is still valid if „it is
expressed in writing and registered under the law (if any) for the time being in
force for the registration of such documents, and is made on account of natural
love and affection between parties standing in a near relation to each other.‰

This means the agreement that is not supported by any consideration is valid if it
fulfils the following conditions:
1. The agreement is made in writing;

2. The agreement is registered under the existing law which requires its
registration; and
3. The agreement is made on account of natural love and affection between
the parties standing in near relation to each other.
For example: A, for natural love and affection, promises to give his son, B,
RMl,000. A puts his promise to B into writing and registers it under a law for
the time being in force for the registration of such documents. This is a
contract.
Under the exception, there is a phrase Ânear relationÊ that is attached to the
position of the parties in the agreement. What is meant by Ânear relationÊ? It is not
defined in the Act, but an example of case in which an attempt was made to
define the term, is the case of :
Re Tan Soh Sim [1951] MLJ 21
In this case, there was an agreement made between members of a Chinese

family, governed by their personal laws. The deceased Tan Soh Sim (in her
illness) had made a wish that her estate should be divided among her two
adopted sons and two adopted daughters. The legal next-of-kin drew up an
agreement renouncing all rights in favour of the four adopted children (who
were their nephews and nieces). The issues to be resolved in this case were
whether:
• An agreement was made on account of natural love and affection; and

• Three sisters and seven half-sisters and brothers stood in near
relationship to their adopted nephews and nieces.
The court granted that: Chinese adopted children are related to the adoptive
parents and brothers, but they were not nearly related to the family of their
adoptive mother. Thus, the uncles and aunties of the adoptive mother did
not stand in near relation to their nephews and nieces. In such a case, there
was no natural love and affection between the signatories and the donees.
The agreement was void.

Therefore, in order to enforce the agreement made on account of natural love and
affection, the court must be satisfied that the parties who enter into the
agreement must stand in near relation to each other besides having natural love
and affection. The term Ânear relationÊ is not defined in the Act. Thus, what
signifies Ânear relationÊ may be different for every social group, depending on the
ethnic groups and their customs. This is because the personal law relating to the
family matters are applicable to the groups.
2.2.2 Agreement to Compensate a Past Voluntary Act

This is the exception provided in Section 26(b), Contracts Act 1950. The rule
provides that an agreement without consideration is valid if „it is a promise to
compensate, wholly or in part, a person who has already voluntarily done
something for the promisor, or something which the promisor was legally
compellable to do.‰
It means, if the promisee has done some act voluntarily on his own will, for the
promisor (without being requested by the promisor), and subsequently the
promisor promises to compensate the promisee for such act, then that promise is
enforceable. Similarly, if the promisee has done some act (an act which the
promisor is compellable to do in law, for example, paying tax to the government)
voluntarily on his own will for the promisor, the promise made by the promisor
to compensate the act is also enforceable.
For example: A supports B's infant son. B promises to pay A's expenses in
doing so. This is a contract and A can enforce BÊs promise.
Similar to Section 2(d), this exception covers the principle on past consideration
which has been explained above. If section 2(d) covers an act which has been
done at the request of the promisor, Section 26(b) covers an act which has been
done voluntarily by the promisee (before the promise to compensate the
promisee is made by the promisor). What is meant by ÂvoluntarilyÊ is not defined
in the Act but an example of case that considered the term is the case of:

J.M. Wotherspoon & Co. Ltd. v. Henry Agency House [1962] MLJ 86
In this case, there were arrangements between a Malaysian and an English

firm. The arrangements were that the Malaysian firm would find buyers and
inform the English firm, who would then find the sellers. When a sale had
been arranged, a commission would be paid to the Malaysian firm. The
dispute arose in this case was that after the Malaysian firm arranged a buyer
for confectionery and the English firm found a seller, things went wrong. The
English firm then sued the Malaysian firm for the loss it suffered because of
non-payment by the buyer.
The court found that: there were promises of compensation made by the
defendant firm to the plaintiff, but these promises were not supported by
consideration. Therefore, the promises cannot be legally enforceable, unless it
falls under Section 26(b); ‰a promise to compensate, wholly or in part, a
person who has already voluntarily done something for the promisor.‰
The question was whether the plaintiff had already ÂvoluntarilyÊ done
something for the defendant. It was found that the plaintiff had acted on the
suggestion of the defendant, so that the action could not be said to have been
done voluntarily. Therefore, the promise made by the defendant firm to
compensate the plaintiff was not enforceable.
Thus, in order to enforce the promise made for past consideration under Section
26(b), the promisee must have acted voluntarily for the promisor in that
particular action.
2.2.3 Agreement to Pay a Statute-barred Debt

This is another exception provided in Section 26(c), Contracts Act 1950. The rule
provides that an agreement without consideration is valid if „it is a promise,
made in writing and signed by the person to be charged therewith, or by his
agent generally or specially authorised in that behalf, to pay wholly or in part a
debt of which the creditor might have enforced payment but for the law for the
limitation of suits.‰
What it means under this exception is that, the promisor is liable to pay a
previous debt (which the creditor cannot recover through legal action because
the time within which the creditor must commence legal action is limited by
statute) if the following conditions arise:

• The debtor makes a fresh promise to pay the statute-barred debt; and
• The promise is made in writing and signed by the person to be charged or
his authorised agent.
For example: A owes B RM1,000, but the debt is barred by limitation. A signs a
written promise to pay B RM500 on account of the debt. This is a contract.
What is meant by a statute-barred debt? It is a debt which cannot be recovered

because the time allowed to a party to enforce his legal rights is limited by the
Limitation Act 1953. The Limitation Act provides six years as the time limit for
any party to take legal action in contract. The six years run from the time the
cause of action arises (usually from the time of the breach of contract by the
contracting party). Therefore, the promise to pay a statute-barred debt under this
exception will form a new cause of action although without consideration, and
the fresh promise is valid. This is provided in section 26(2) of the Limitation Act
1953.
SELF-CHECK 2.2
(a) What is the general rule of consideration?

(b) Is there any exception available to the general rule of
consideration?
(c) What was the decision of the court in the case of J.M.
Wotherspoon & Co. Ltd. v. Henry Agency House [1962] MLJ 86?
(d) What are the important conditions required in an agreement to
pay a statute-barred debt?

ACTIVITY 2.2
Discuss the following problems by applying the principle of law on the
exception to consideration:
(a) Mr Ajay was a successful business man. One day, he promised
his eldest son, Suresh that he wishes to transfer one of his
bungalows to Suresh to show how much he loved him. Mr Ajay
made his promise in writing and registered it. A few years later,
when Suresh married Salwath, Suresh requested from Mr Ajay
the possession of the bungalow for him to start his matrimonial
life. However, Mr Ajay was reluctant to accept Salwath as his
daughter-in-law and refused to give Suresh the bungalow.
Advise Suresh.
(b) Azrai, a bank manager left for his hometown in haste as his
mother passed away. He left his briefcase containing important
documents on his table. Unfortunately, a fire broke out at the
bank. Baini, the secretary of the bank manager, saw the briefcase
and realising that the briefcase was so important to her boss,
dashed into the room and took the briefcase with her. Azrai
reported back to work for the subsequent week and felt so
relieved that the briefcase was not destroyed in the fire. Azrai
promised to give Baini a reward in the sum of RM1,000 in return
for BainiÊs act. Several weeks passed and there was no sign of
Azrai giving Baini the reward. Baini came to see Azrai for the
reward but Azrai refused to pay her on the basis that it was
BainiÊs duty as his secretary to do so. Advise Baini.
2.3 MUST CONSIDERATION MOVE FROM THE

PROMISEE?
After understanding the general rule of consideration and the exceptions, it is
important to know from whom the consideration can come? Must the
consideration come from the promisee only or can the consideration come from
some other persons (who is not the party in the contract?).
The principle relating to who should furnish a consideration is different in the

Malaysian Contracts Act and the common law of England. Under common law,
consideration must move from the promisee. This means, the person who gets
the promise must personally give something in return as the consideration for
the promise. The idea is that, if a person furnishes no consideration, he takes no
part in the contract. Under the Malaysian Contracts Act, the promisee can enforce
the promise even though he personally does not give any consideration. Such
consideration can come from some other persons. The authority for this principle
is in Section 2(d), Contracts Act which provides the words „any other person‰, in
the following part of the provision:
„........the promisee or Âany other personÊ has done or abstained from doing.....‰.
Therefore, even though the promisee does not give any consideration for a
promise made by the promisor, he can still claim for the promise if the
consideration is given by some other persons.
For example: A promises to pay B RM1,000 when C paints AÊs house. As soon
as C completes the work (paints AÊs house), B can claim the amount of
RM1,000 from A although B does not personally give any consideration for
AÊs promise. This is because the consideration has moved from C.
A case to illustrate this principle is:
Venkata Chinnaya v. VerikataraÊmaÊya (1881) I.L.R. 4 Mad. 137.
The case was about a sister who agreed to pay an annuity of Rs 653 to her
brothers who provided no consideration for the promise. On the same day,
their mother gave the sister some land with the requirement that the sister
must pay the annuity to her brothers. Later, the sister failed to fulfil her
promise to pay the annuity and her brothers sued her on the promise.
The court ruled that: The sister was liable to pay the brothers. Even though the
consideration did not move from the brothers, there was a valid consideration
that was given by their mother.
2.4 ADEQUACY OF CONSIDERATION

Another important principle is the adequacy of consideration. The question is:
must consideration be adequate? Can you sell your house worth of RM100,000
for only RM100 to Mr. Man? Is the amount of RM100 sufficient as consideration
for your promise?
According to Explanation 2 of Section 26, Contracts Act 1950, „an agreement to

which the consent of the promisor is freely given is not void merely because the
consideration is inadequate......‰ What is meant by the provision is that, the
adequacy of consideration is immaterial. The consideration given for the promise
need not be adequate as long as the agreement has been entered into by the
parties with free consent. Free consent means the parties do not enter into such
contract under fraud, oppression, misrepresentation, suppression of the value of
property, urgent necessity for money, weakness of understanding or ignorance.
For example: A agrees to sell a horse worth RMl,000 for RMl0. A's consent to
the agreement was freely given. The agreement is a contract notwithstanding
the inadequacy of the consideration.
Thus, if you agree to sell your house that worth RM100,000 to Mr. Man for only
RM100, this agreement is a contract, provided that your consent to sell at that
amount is freely given. You are not under fraud or oppression, etc. to sell at that
price.
However, Explanation 2 of Section 26 further reads, „......but the inadequacy of

the consideration may be taken into account by the court in determining the
question whether the consent of the promisor was freely given.‰ This clause
For example: A agrees to sell a horse worth RM1,000 for RMl0. A denies that
consent to the agreement was freely given. The inadequacy of the
consideration is a fact which the court should take into account in considering
whether or not A's consent was freely given.
means the court will consider the adequacy of consideration, only when the issue
of free consent is raised by the contracting party.
A case to illustrate this principle is:
Phang Swee Kim v. Beh I Hock [1964] MLJ 383.
This case involved the respondent who agreed to transfer a parcel of land to
the appellant on payment of $500 when the land was subdivided. At that time,
the land was worth much more than the price. Subsequently, the respondent
refused to honour the promise and claimed that the promise was
unenforceable. The trial judge in the case held that the agreement was void
because of inadequacy of consideration. However, on appeal, the Federal
Court reversed the decision and applied the principle in Explanation 2 of
Section 26.
Hence, the agreement to transfer the land to the appellant for the $500 payment
was valid and the promise was enforceable because the consent was freely given
by the respondent although the consideration was inadequate.

SELF-CHECK 2.3
(a) Can the promisee enforce the promise made by the promisor if
the consideration is given by some other persons?
(b) Would the principle on the above situation (para (a) above) be the
same under the English common law?
(c) What is meant by adequacy of consideration?
(d) Why is the free consent of the promisor important in considering
the adequacy of consideration?
ACTIVITY 2.3
Discuss the following problems by referring to the relevant principle

of law on consideration:
(a) Mr J, who decided to make a home improvement to his cottage,

had requested K to paint his cottage and to build up certain
fences around the cottage. He promised to pay K double of the
usual payment charged by any other contractors for that purpose
and the arrangement was agreed by K. The next day, K sent his
nephew, M to start the work. M managed to complete the said
improvement work within two weeks and upon the completion
of the work, K came to see Mr J for the payment. However, Mr J
refused to pay K because he got to know that it was M who had
performed the work and not K. Advise K whether he could claim
for the payment from Mr J.
(b) Zaitun, a local trader in the town offered Hana a sale of a

slimming apparatus which is worth RM10,000 in the market for
only RM1,000, as she decided to clear the stock of that model (SE-
101). Hana agreed to buy the apparatus and to collect it from
ZaitunÊs office. On the day of collection, Zaitun changed her
mind and told Hana that she had wrongly decided to sell the
apparatus at that price. Advise Hana as regard to the validity of
the contract.

• An agreement made without consideration is a void agreement.

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

Executed consideration Promisee
Executory consideration Promisor
Free consent Voluntary act
Text Books:

Cases:
• J.M.Wotherspoon & Co. Ltd. v. Henry Agency House [1962] MLJ 86.
• Kepong Prospecting Ltd. & S.K. Jagatheesan & Ors v. A.E. Schmidt &
Marjorie Schmidt [1968] 1 MLJ 170.
• Lampleigh v. Braithwait (1615) 80 ER 255.
• Osman bin Abdul Ghani & Ors v. United Asian Bank Bhd [1987] 1 MLJ 27.
• Phang Swee Kim v. Beh I Hock [1964] MLJ 383.
• Re Tan Soh Sim [1951] MLJ 21.
• Venkata Chinnaya v. VerikataraÊmaÊya (1881) I.L.R. 4 Mad. 137.

Topic X Law of
3 Contract
(Intention to
Create Legal
Relations)
LEARNING OUTCOMES
1. Explain the importance of intention to create legal relations in
an agreement;
2. Discuss the presumption of intention in domestic, family and
social agreements;
3. Analyse the situations in which the presumption of intention
is rebuttable; and
4. Compare the presumption of intention in business or
commercial agreements.
X INTRODUCTION
Any agreement made between the parties (the proposer and the acceptor) will
only become a binding contract if both parties intend to make the contract
enforceable. The element of intention has not been defined in the Contracts Act
1950 and there is no provision in the Act which clearly provides the element of
intention as one of the elements to form a valid contract. The provisions which
may impliedly refer to the element of intention is the word Âwith a viewÊ used in
Section 2(a), and the word Âat the desireÊ used in Section 2(d) of the Act.
However, the principles in the English common law will apply in the absence of

36 X TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)
such provision under the Contracts Act 1950. In determining whether there is an
intention by the parties to create a legally binding contract, the law has divided
an agreement into two categories:
(a) Domestic, Family and Social Agreements
(b) Business Agreements
3.1 DOMESTIC, FAMILY AND SOCIAL

AGREEMENTS
In domestic, family and social agreements, the presumption made is that the
parties in the contract do not intend their agreement to have legal relations. This
means, the parties to the agreement do not contemplate any legal consequence to
arise from their agreement. It is because this type of agreement is made every
day between the family and social members and between spouses for many
arrangements, that no parties would intend to go to the court for breach of such
arrangements and promises made. The English case which pointed up the
principle is the case of:
Balfour v. Balfour [1919] 2 K.B. 571
In the case, a husband was employed in a government post in Ceylon. He

returned with his wife to England on leave, but she was unable to go back to
Ceylon with him for medical reasons. He consequently promised orally to
make her an allowance of £30 a month until she rejoined him. The husband
failed to make the payment and the wife sued him.
The Court held that: Although it was not impossible for a husband and wife to
enter into a contract for maintenance, in this case they never intended to make
a bargain which could be enforced in law. Thus, there was no enforceable
contract between the parties.
Therefore, in the above case that involves husband and wife, there is a
presumption of no intention to create legal relations. However, if the
presumption can be rebutted on the evidence that there was a serious intent, then
a different situation will appear. For example, where a husband and wife were
living together but not in amity or were separated when the agreement was
made, the court may enforce the agreement. The following case illustrates the
situation:

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

Simpkins v. Pays [1955] 3 All ER 10
The defendant and the defendantÊs granddaughter in this case made an

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

Gould v. Gould [1969] 3 All ER 728.
In this case, a contractual intention was negatived when a husband (who

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

In PadavattonÊs case, although there seemed to be an assumption that there was a

contractual intent in the motherÊs promise because it caused Mrs Padavatton to
leave her job to study law, the vagueness of the arrangement with Mrs Jones had
negatived that intent.
SELF-CHECK 3.1
(a) How does the law determine the existence of an intention in any
agreement between the parties?
(b) What is the presumption on intention to create legal relations in a
domestic, family and social agreement?
(c) In relation to question (b) above, is this presumption rebuttable?
How?
(d) What was the principle established by the court in the case of
Merritt v. Merritt [1970] 2 All ER 760?
(e) Must the words used by the parties in their agreement, certain
and unambiguous? Why?
ACTIVITY 3.1
Discuss the following problems by applying the principle of law on
intention to create legal relations:
(a) Three sisters, Viv, Valerie and Victoria, agree to form a syndicate
for the purpose of making a weekly entry in a fashion contest in a
local newspaper. Viv and Valerie do not know much about fashion
and give Victoria RM7.00 each week. Victoria fills in and sends off
the contest forms every week and she always fills the forms in her
own name. After one month, one of the entries that Victoria sends
wins a RM10,000 prize. Viv and Valerie are very happy to know
about the news and they want to claim their shares. Victoria now
refuses to share. Advise Viv and Valerie.
(b) Mr. Alan and Mrs. Alan are husband and wife. Lately, they had a
quarrel over the week because Mr. Alan was very busy with his
business trips and had no time for a vacation with Mrs. Alan. Mrs.
Alan had expressed her intention to go back to her hometown if the
situation remained the same. After a series of argument, Mr. Alan
promised Mrs. Alan that if he got a new business offer, he would
take Mrs. Alan to Neverland for a vacation. Mrs. Alan was very
happy and she gave up her intention to go back to her hometown.
Two months later, Mr. Alan was offered a new business contract
and Mrs. Alan wanted to enforce the promise made by her
husband. Explain whether she will succeed in her claim.

3.2 BUSINESS OR COMMERCIAL AGREEMENTS

In business or commercial agreements, the presumption made is that the parties
in the contract have the intention to create legal relations. This means the parties
to the agreement contemplate a legal consequence to arise from their
arrangements. The presumption is a strong one and can be seen in the judgement
of the case of:
Edwards v. Skyways Ltd [1964] 1 All ER 494
In this case, the defendants who had promised to make an ex gratia

payment to the employees contended that they were not bound to fulfil
their obligation. However, the Court held that: the use of the words ex
gratia in regard to an airline pilotÊs contractual redundancy payment did
not alter the presumption. Therefore, the airline had to make the payments
because the agreement was enforceable.
However, it is not necessary that there is an intention to create legal relations just
because the parties are in business. The parties to a business transaction may
state that they do not intend to enter into any legal obligation. In such a case, the
court will then treat their promises as binding in honour only. The following
cases illustrate this point:
Jones v. VernonÊs Pools Ltd [1938] 2 All ER 626
The claimant in this case had sent to the defendants a successful football
coupon but the defendants denied having received it and relied on a clause
printed on every coupon. The clause provided that the transaction should
not „give rise to any legal relationship.....or be legally enforceable .... but .....
binding in honour only‰.
The Court held that: This clause was a bar to any action in a court of law.

Rose and Frank Co. v. Crompton (JR) & Brothers Ltd [1925] AC 445.
In this case, the agreement between the claimant and the defendants
contained an ÂHonourable Pledge ClauseÊ as follows: „This arrangement is
not entered into nor is this memorandum written as a formal or legal
agreement and shall not be subject to legal jurisdiction in the courts of the
United States of America or England....‰.
The Court held that: The agreement was not binding on the parties.
It is however important to note that most business agreements are to be regarded

as binding in the absence of the ÂHonorouble Pledge ClauseÊ or anything similar
to this, because such clauses are relatively rare in the business world.
Apart from the above clauses, there are other various clauses used in business
agreements that negates the contractual intention. The most common is the use of
the words „subject to contract‰ or „subject to formal contract‰. Such agreement
gives rise to no legal liability. The case to explain this is the case of:
Winn v. Bull (1877) 7 ChD 29
A written agreement was drawn up whereby the defendant agreed to take

a lease of a house for a definite period and at a fixed rent, but „subject to
the preparation and approval of a formal contract‰.
The Court held that: There was no contract.
Therefore, the insertion of the words „subject to contract‰ renders the agreement
to be unenforceable. It means a binding contract will come into existence only
when a subsequent formal contract is entered into by the parties. Up to this time,
either party is free to renegotiate or even to withdraw from their arrangements.

The decision in the case of Winn v. Bull was cited in the case of:
Low Kar Yit & Ors. v. Mohd. Isa & Anor. [1963] MLJ 165
The defendant in this case gave an option to the plaintiffsÊ agent to buy a
parcel of land subject to „a formal contract to be drawn up and agreed upon
by the parties‰. Subsequently, the plaintiffsÊ agent exercised the option but
the defendant failed to sign the agreement for sale. The plaintiffs brought an
action for specific performance or (alternatively) damages for breach of
contract.
The Court held that: The option was conditional upon and subject to a
formal contract to be drawn up and agreed upon between the parties. Thus,
the exercise of the option amounted to nothing more than an agreement to
enter into an agreement.
In most instances like the above cases, the use of the words „subject to contract‰
infers that there is no intention by the parties to create legal relations.
However, the Privy Council had rejected a „subject to contract‰ issue in a case
involving a booking pro forma signed by the purchaser to purchase a house to be
built by a housing developer. The case is:
Daiman Development Sdn Bhd v. Mathew Lui Chin Teck & Anor [1981] 1
MLJ 56
The purchaser (respondent) signed a booking pro forma for a purchase of a

house to be built by the housing developer (appellants). After the payment
of a deposit was made and the pro forma was signed, the appellants
informed the respondent that the price of the house was to be increased.
The respondent did not agree and applied to the court for specific
performance. The appellant argued that the pro forma was „subject to
contract‰. Thus, no contractual obligation arose from the pro forma itself
until a further document was agreed and signed. The argument was
rejected by the court.
The Lordships held that: The appellants were bound by the pro forma and
could not argue that it did not create an obligation to purchase and sell the
property.

Note: The provision as to booking pro forma has been abolished and under the
current provisions of the Housing Development (Control and Licensing) Act
1966, it is an offence to collect any money from a purchaser as a booking pro
forma.
SELF-CHECK 3.2
(a) What is the presumption on intention to create legal relations in a

business or commercial agreement?
(b) Is there any reason for the parties of a business transaction to say
that they do not have the intention to be bound by their
arrangements?
(c) How does the clause „subject to contract‰ render the agreement to
be unenforceable?
ACTIVITY 3.2
Discuss the following case by applying the principle of law on intention

to create legal relations:
(a) On 10 July 2002, Mr Ferrera claimed to have submitted two football

pool coupons to Bigwood Pools Ltd. Each coupon draw a fee of
RM3.24, for football matches played on 11 July and one of the
coupons was a winning coupon entitling him to RM174,000.
Bigwood, however, refused to pay and denied that they had ever
received the winning coupon. Bigwood also relied on a clause
printed on each coupon which stated that: „The following
transaction should not give rise to any legal relationship or legally
enforceable. It is binding in honour only‰.
Decide whether there was a binding contract between Mr Ferrera

and Bigwood Pools Ltd.
• An agreement without an intention to create legal relations does not bind the
parties to the agreement.

• In domestic, family and social agreements, the parties are presumed not to
have any intention to create legal relations.
• The presumption of no intention may be rebutted if there is a proof of true
intention of the parties.
• Uncertainty of words in an agreement may render the agreement
unenforceable.
• In business or commercial agreements, the parties are presumed to have the
intention to create legal relations.
• Various clauses used in business or commercial agreements have the effect
that negates the contractual intention.
Business agreement Intention to create legal relations

Certainty Presumption
Domestic agreement Rebuttable presumption
Family agreement Social agreement
Text Books:
• Guest, A. G. (1988). AnsonÊs Law of Contract (26th ed.). Singapore: Oxford
University Press.
• Wu M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.).
Cases:
• Balfour v. Balfour [1919] 2 K.B. 571.
• Daiman Development Sdn Bhd v. Mathew Lui Chin Teck & Anor [1981] 1
MLJ 56.
• Edwards v. Skyways Ltd [1964] 1 All ER 494.

• Gould v. Gould [1969] 3 All ER 728.

• Jones v. Padavatton [1969] 2 All ER 616.
• Jones v. VernonÊs Pools Ltd [1938] 2 All ER 626.
• Low Kar Yit & Ors. v. Mohd. Isa & Anor. [1963] MLJ 165.
• Merritt v. Merritt [1970] 2 All ER 760.
• Parker v. Clark [1960] 1 W.L.R. 286.
• Rose and Frank Co. v. Crompton (JR) & Brothers Ltd [1925] AC 445.
• Simpkins v. Pays [1955] 3 All ER 10.
• Winn v. Bull (1877) 7 ChD 29.

Topic X Law of
4 Contract
(Capacity to
Contract)
LEARNING OUTCOMES
1. Identify the importance of contractual capacity of a minor to
contract;
2. Describe the types of contract validly entered into by a minor;
3. Examine the effect of a minor contract;
4. Explain the importance of mental capacity for purpose of
contract; and
5. Discuss the status of contract made by an unsound mind
person.
X INTRODUCTION
In forming a valid contract, it is important that the person who enters into the
contract must have the full capacity in terms of age and mind. This means, the
person who has not reached the age of majority or unsound mind cannot make a
valid contract (Refer to Figure 4). This is provided by Section 11 of the Contracts
Act 1950, „every person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject‰. The following

48 X TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT)
discussion will also look into the status of a contract entered into by a minor and
an unsound mind person.
Figure 4.1: Persons who cannot make valid contract

TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT) W 49
4.1 MINORS
A minor or an infant is a person who is below the age of majority. Under the Age
of Majority Act 1971, the age of majority is 18 years. With regards to the minorÊs
contractual capacity, the general rule is that all contracts entered into by a minor
are void. The authority derived from the following Indian case of:
Mohori Bibee v. Dhurmodas Ghose (1903) I.L.R. 30 Cal. 539.
The Privy Council held that: the combined effects of sections 10 and 11 of the
Indian Contracts Act (which is similar to the same sections of the local Act)
rendered the contracts void.
The local case that applied the decision in the Mohori BibeeÊs case was the case
of:
Tan Hee Juan v. Teh Boon Keat [1934] MLJ 96.
The plaintiff in this case was an infant. The infant executed transfers of land in
favour of the defendant. The transfers were witnessed and registered. Later,
the plaintiff applied to the court for an order to set aside the transfers and for
incidental relief.
The Court ruled that: the transactions were void and ordered the restoration of
the property to the minor.
Normally, when a contract is void, under Section 66 of the Contracts Act 1950,
„any person who has received any advantage under the agreement or contract is
bound to restore it, or to make compensation for it, to the person from whom he
received it‰.
However, the Privy Council in Mohori BibeeÊs case decided that a party who is a
minor cannot be compelled to repay any moneys which he has received in the
contract. Thus, Section 65 of the Indian Contracts Act (similar to Section 66,
Malaysian Contracts Act) does not apply to a minor contract. It applies to a
contract between competent parties, whereas in a case involving a minor, the
contract never exists from the beginning.

In the case of Tan Hee Juan, the plaintiff (minor) had received the purchase price
for the transfers of land to the defendant. However, when the court made an
order declaring the transfers void, the court refused to order the minor to refund
the purchase price paid by the defendant.
4.1.1 Valid Contracts (Exceptions to Minors)

There are certain exceptions available to contracts entered into by a minor. It
includes those exceptions under the:
Exceptions to Minors
• Age of Majority Act 1971 (including matters relating to marriage, divorce,

dower, adoption; religion and religious rites and usages of any class of
persons within Malaysia; and any other written law fixing the age of
majority).
• Contracts Act 1950 (contract for necessaries).
• Contracts (Amendment) Act 1976 (contract of scholarships).
• Insurance Act 1963 (Revised 1972) (contract of insurance).
(a) Exceptions under the Age of Majority Act 1971

The Age of Majority Act provides exceptions to the general rule that minor
contracts are void. The exceptions include:
(i) The capacity of any person to act in matters relating to marriage,
divorce, dower and adoption;
(ii) The religion and religious rites and usages of any class of persons
within Malaysia; and
(iii) Any other written law fixing the age of majority.
The above provision shows that minors can enter into contracts of promise
of marriage and the contracts are valid. Apart from marriage contracts, etc.,
minors can also make a valid contract depending on the statute that
provides the age of majority for particular purposes. For example, the age
for voting is 21 years, and the age of a young person to join a trade union is
above 16.
An example of case where a minor entered into a valid contract of promise

of marriage is the case of:

Rajeswary & Anor. v. Balakrishnan & Ors. (1958) 3 MC 178.
The parties in this case were Ceylonese Hindus. They entered into a
marriage agreement according to customary practice that provides for a
dowry and a penalty for breach, and they went through a customary
ceremony. Later, the first defendant repudiated the promise of marriage and
the plaintiffs then brought an action for breach of promise of marriage. The
defendant pleaded that the first plaintiff had no capacity to enter into the
marriage contract because she was a minor.
The High Court held that: the age of majority for entering into a marriage
contract differed from other minor contracts and were not affected by the
general principle established in the Mohori BibeeÊs case.
In the above case, the contract was a valid contract and enforceable
although the party to the contract was a minor.
(b) Contract for Necessaries

Contract for necessaries is another exception to the general rule. A minor
who enters into a contract for necessaries is liable for the contract.
According to Section 69 of the Contracts Act 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‰.
It is important to observe the principles in Section 69 as follows:

• The necessaries have been supplied to a minor.
• The minor is also liable for necessaries supplied to his dependants (wife
and children).
• The supplier of necessaries may only claim for reimbursement (a
reasonable price).
• The minor is not personally liable and this means he is liable to pay only
if he has the property to do so.
The above principles will therefore apply to contract for necessaries entered
into by a minor. The contract will be valid if the minor has been supplied
with articles which are considered as necessary to the minorÊs actual
requirements and suited to the minorÊs condition in life. For example, food,

shelter, clothing, medical services, and education. The Contracts Act 1950
does not define the word ÂnecessariesÊ but the concept has been mentioned
by the Lordship in the case of Government of Malaysia v. Gurcharan Singh
& Ors [1971] 1 MLJ 211, by holding that education was ÂnecessariesÊ for the
minors.
In Government of Malaysia v. Gurcharan Singh & Ors [1971] 1 MLJ

211,
The Government sued the first defendant (the minor) and the second
and third defendants (the sureties) for breach of contract. The amount
of claim was Rm11,500.00, being the sum spent by the Government for
the minorÊs education. At the time when the contract was made, the
first defendant was a minor.
The Court held that: The contract was void but since education was
ÂnecessariesÊ, the minor was liable for the repayment of a reasonable
sum spent on him. The amount ordered as payment to the Government
was Rm2,683 because the minor has served the Government for three
years and ten months out of the contractual period of five years.
An example of contract for the minorÊs benefit was the case of:
Roberts v. Gray [1913] 1 KB 520.
The defendant in this case wished to become a professional billiards

player and entered into an agreement with the claimant, a leading
professional, to go on a joint tour. The claimant went to some trouble in
order to organise the tour, but a dispute arose between the parties and
the defendant refused to go. The claimant now sued for damages of
£6,000.
The Court held that: The contract was for the minorÊs benefit. Thus, the
claimant could continue the action for damages for breach of contract.
Damages of £1,500 were awarded.
As far as the goods or services are concerned, if the goods or services have a
utility value, such as clothing, and are not merely things of luxury (e.g. a
diamond tiara), then they are basically necessaries. However, if the minor is
well supplied with the particular articles, then they will no longer be

necessaries even though they are useful for the minor. As illustrated by the
following case:
Nash v. Inman [1908] 2 KB 1
The claimant was a Savile Row tailor and the defendant was a minor
undergraduate at Trinity College, Cambridge. The claimant sent his
agent to Cambridge because he had heard that the defendant was
spending money freely, and might be the sort of person who would be
interested in high-class clothing. Following the agentÊs visit, the
claimant supplied the defendant with various articles of clothing to the
value of £145. The clothes included 11 fancy waistcoats. The claimant
then sued the minor for the price of the clothes. There was evidence
that the minorÊs father was in a good position, being an architect with a
town and country house, and it could be said that the clothes supplied
were suitable to the defendantÊs position in life. However, the father
proved that the defendant was adequately supplied with such clothes
when the claimant delivered the clothing.
It was held that: The claim failed because the claimant had not
established that the goods supplied were necessaries.
The above case shows that a minor will not be bound by a contract of goods
supplied, which are not of necessaries for the minor. The burden to prove
that the goods supplied are necessaries for the minor is on the supplier or
the seller.
(c) Contract of Scholarships

Another exception to the minorÊs contract is the contract of scholarships.
The rule relating to scholarship agreements is provided in the Contracts
(Amendment) Act 1976. Section 4(a) provides that no scholarship
agreements shall be invalidated on the grounds that the scholar entering
into such agreement is not of the age of majority‰. The „Scholarship
Agreements‰ have been defined as any contract or agreement between an
appropriate authority and any person, with respect to any:
• Scholarship
• Award
• Bursary
• Loan
• Sponsorship
• Appointment to a course of study

• Facility for the purpose of education or learning.
„Appropriate authority‰ includes:

• The Federal Government
• A State Government
• A statutory authority
• An educational institution.
The above rule, however, is not applicable to contract of scholarships

between minors and private organisations.
(d) Contract of Insurance

Contract of insurance also constitutes an exception to the minorÊs contract.
Section 153 of the Insurance Act 1963 (Revised 1972) provides that „a minor
over the age of ten may enter into a contract of insurance but if he or she is
under sixteen years, the written consent of the parents or guardians is
essential.
4.2 PERSON OF SOUND MIND

With regards to capacity to contract, it is important that at the time of making the
contract, the contracting party must not suffer from mental disability. Section 11
of the Contracts Act 1950 states that „every person is competent to contract...who
is of sound mind, and is not disqualified from contracting by any law to which he
is subject‰.
Section 11 is followed by Section 12(1) of the Contracts Act 1950 which provides
that „a person is said to be of sound mind for the purpose of making a contract if,
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‰.
Further, Section 12(2) and (3) state that „a person who is usually of unsound
mind, but occasionally of sound mind, may make a contract during the period
when he is sound. Conversely, a person who is usually of sound mind, but
occasionally of unsound mind, may not make a contract when he is of unsound
mind‰.
The examples of contracts covered under Section 12 can be seen in Illustrations

(a) and (b) as follows:

Illustration (b)
A sane man, who is delirious from fever, or who is so drunk that he cannot
understand the terms of a contract, or form a rational judgment as to its effect
on his interest, cannot contract whilst such delirium or drunkenness lasts.
Illustration (a)
A patient in a mental hospital, who is at intervals of sound mind, may contract

during those intervals.
In Matthews v. Baxter (1873) LR 8 Exch 132,
Matthews agreed to buy houses from Baxter. He was so drunk as not to

know what he was doing. Afterwards, when sober, he ratified and
confirmed the contract. It was held that both parties were bound by it.
The Contracts Act 1950 does not state the status of contracts entered into by
persons of unsound mind. Under the English common law, the contract is
voidable if the fact of mental disorder or intoxication can be proven, and the
other party knew this. Thus, the drunken person can ratify contracts when sober,
as in the above case of Matthew.
SELF-CHECK 4.1
(a) What is the legal effect of a contract entered into by a minor?

(b) Is there any exception to the above principle?
(c) What are the important principle laid down in Section 69 of
the Contracts Act 1950?
(d) Can the contracting party sue a minor for damages under
contract for necessaries?
(e) What is the effect of a contract entered into by a person who is
of unsound mind?

ACTIVITY 4.1
Discuss the following cases by applying the principles of law on
capacity to contract:
(a) Alan is a college university student, aged 17. He had
difficulty in coming to the college and decided to purchase
a Modenas (the national motorcycle of Malaysia) from
Ismail. Alan paid RM500.00 as the deposit for the
motorcycle and promised to pay the balance of the
purchase price in two weeks time. After two weeks, Alan
failed to come with the balance and Ismail wanted to claim
from Alan for the payment. At the same time, Alan, who
was in need of money, had disposed the motorcycle to his
other friend, Rani. Can Ismail succeeded in his claim?
Discuss.
(b) Norman, aged 17, enters into a contract of apprenticeship
with Roy to become a successful enterpreneur in health
product. For that purpose, Norman is given a training on
the marketing aspect of the product. An outlet is provided
for Norman to carry out his tasks and goods worth
RM10,000 are ordered for Norman. Later, Roy has some
difficulties in supervising NormanÊs training and
disagreement arises between them. Norman is not happy
and decides to withdraw himself from the training. Roy is
not happy either and brings an action for damages for
breach of contract of RM20,000. Discuss the legal action that
can be taken by Roy against Norman.
• Contracts made by minors are void.

• Marriage contract, contract for necessaries, contract of scholarship and
contract of insurance constitute valid contracts for minors.
• Contract for necessaries include contract to supply goods or services to the
minors which suited to his condition in life.
• However, the supplier of necessaries may only claim a reasonable price from
the minor.
• A minor is only liable to pay from his property and he is not personally
liable.

• The burden to prove that goods or services supplied are necessaries is on the
supplier.
• A person who is competent to contract includes a person who is of unsound
mind.
• A person may make a contract during the period when he is sound.
Capacity Marriage contract

Minor Scholarship
Necessaries Insurance
Reimbursement Sound mind
Text Books:
Cases:
• Government of Malaysia v. Gurcharan Singh & Ors [1971] 1 MLJ 211.
• Matthews v. Baxter (1873) LR 8 Exch 132.
• Mohori Bibee v. Dhurmodas Ghose (1903) I.L.R. 30 Cal. 539.
• Nash v. Inman [1908] 2 KB 1.
• Rajeswary & Anor. v. Balakrishnan & Ors. (1958) 3 MC 178.
• Roberts v. Gray [1913] 1 KB 520.
• Tan Hee Juan v. Teh Boon Keat [1934] MLJ 96.

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

TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) W 59
more persons are said to consent when they agree upon the same thing in the
same sense.‰ Therefore, under Section 14, consent must be free and not caused by
Refer to Figure 5.1 :
• Coercion (Section 15).
• Undue influence (Section 16).
• Fraud (Section 17).
• Misrepresentation (Section 18).
• Mistake (Section 21, 22 and 23).
Figure 5.1: Factors which affect consent
5.1 COERCION
Coercion under Section 15 of the Contracts Act 1950 means „the committing, or
threatening to commit any act forbidden by the Penal Code, or the unlawful
detaining or threatening to detain, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement.‰
It means, if a person commits or threatens to commit any act forbidden under the
Penal Code 1950 (the criminal law of the country) with the intention to make the
other party enter into a contract with him, then he is said to have employed
coercion.

60 X TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)
According to Explanation to Section 15, it is „immaterial whether the Penal Code

is or is not in force in the place where the coercion is employed.‰ What is meant
by the explanation provision is illustrated below:
A, on board an English ship on the high seas, causes B to enter into an

agreement by an act amounting to criminal intimidation under the Penal
Code. A afterwards sues B for breach of contract at Taiping. A has employed
coercion, although section 506 of the Penal Code was not in force at the time
when or place where the act was done.
Coercion under Section 15 covers the common law „duress‰ which means actual
violence or threats of violence to the contracting party. In the case of:
Kesarmal s/o Letchman Das v. Valiappa Chettiar [1954] MLJ 119, the Court
held that: a transfer executed under the order of the Sultan, issued under
duress of two Japanese officers during the Japanese Occupation of Malaya
was invalid.
In the case, consent was not freely given and the transfer became voidable at the
will of the party whose consent was so caused.
In another case of Chin Nam Bee Development Sdn Bhd v. Tai Kim Choo
& 4 Ors. [1988] 2 MLJ 117, the respondents purchased houses to be
constructed by the appellants. Each respondent had signed a sale and
purchase agreement to purchase a house at Rm 29,500. The respondent was
then made to pay an additional amount of Rm 4,000. The issue was
whether the additional payment was made voluntarily or under threat by
the appellants to cancel the respondentsÊ booking.
The Court held that: The payment was not voluntary and had been made
under threat. There was coercion as defined in Section 15 of the Contracts
Act 1950.
5.1.1 Effect of Coercion

Where there is element of coercion in a contract, the contract will become
voidable at the option of the party whose consent was so caused. Section 19(1) of
the Contracts Act, 1950 provides that „when consent to an agreement is caused

by coercion, ....., the agreement is a contract voidable at the option of the party
whose consent was so caused.‰
The term „voidable‰ refers to an agreement which gives one or more parties but
not the other, the choice of either affirming or rejecting it. Thus, the agreement is
valid and binding until the party entitled to avoid it chooses to do so.
5.2 UNDUE INFLUENCE

When a person enters into a contract under the influence exercised by another
person, the contract can be rescinded on the ground of undue influence.
According to Section 16(1) of the Contracts Act 1950, „a contract is said to be
induced by Âundue influenceÊ where the relations subsisting between the parties
are such that one of the parties is in a position to dominate the will of the other
and uses that position to obtain an unfair advantage over the other.‰
Based on the wording of Section 16(1), the two important aspects of undue
influence are :
(a) The domination of the will by one party over the other; and
(b) Obtaining an unfair advantage.
Further, in Section 16(2), a person is said to be in a position to dominate the will

of another where:
(a) He holds a real or apparent authority over the other; or
(b) He stands in a fiduciary relation to the other; or
(c) He makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental; or bodily distress.
5.2.1 Real or Apparent Authority

A person holds a real or apparent authority over the other, for instance; parentsÊ
authority over a child and husbandÊs authority over a wife. For example:
Illustration (a)
A, having advanced money to his son, B, during his minority, upon B's
coming of age, obtains, by misuse of parental influence, a bond from B for a
greater amount than the sum due in respect of the advance. A employs undue
influence.

5.2.2 A Fiduciary Relation

A person stands in a fiduciary relation to the other, for instance; the relationship
of a solicitor-client, a doctor-patient, a trustee-beneficiary and a religious adviser-
follower. For example:
Illustration (b)
A, a man enfeebled by disease or age, is induced, by B's influence over him as

his medical attendant, to agree to pay B an unreasonable sum for his
professional services. B employs undue influence.
Undue influence applies to every case where influence is acquired and abused, or
where confidence is reposed and betrayed.
In the case of Tate v. Williamson (1866) LR 2 Ch App 55,
T (an Oxford undergraduate), aged twenty three, was being pressed to pay his
college debts. He asked his great-uncle to advise him how he should find the
means to pay. The great-uncle was unable to advise in person, owing to ill
health, thus, he deputed the defendant (his nephew) to do so. Conversations
took place between T and the defendant in which T expressed the desire to
sell part of his estate. The defendant offered to buy it for £7000. Before the sale
was completed, the defendant obtained a report from a surveyor on the
property and it was valued at £20,000. The defendant did not disclose this fact
to T, but proceeded with the purchase.
It was held that: The purchase must be set aside. The defendant, having been
asked to give advice, stood in a confidential relationship to T. This prevented
him from becoming a purchaser of the property without the fullest
communication of all material information which he had obtained as to its
value.

Another example of a case where a confidential relationship arises is the case of:
Tufton v. Sperni [1952] 2 T.L.R. 516.
The plaintiff and defendant were fellow members of a committee formed to

establish a Moslem cultural centre in London. It was understood that the
plaintiff would provide the funds for the centre. The defendant induced the
plaintiff to buy his (defendantÊs) own house for the purpose at a price which
grossly exceeded its market value.
The Court of Appeal set the contract aside.
5.2.3 Mental Capacity is Temporarily or Permanently

Affected by Reason of Age, Illness, or Mental;
or Bodily Distress
When a person makes a contract with another person whose mental capacity is
temporarily or permanently affected by reason of age, illness, or mental; or
bodily distress, the presumption is that the person will dominate another
personÊs will, to obtain advantage which is unfair to the other person. The other
person could be old or sick or suffering from certain illnesses or diseases or in a
state of unsound mind, that affect his mental capability and also physical
suffering.
In the case of Che Som bt Yip & Ors v. Maha Pte Ltd & Ors [1989] 3 MLJ 468,
the Court held that: the charge document that has been signed by the third
plaintiff who was unsound mind could be set aside at his option.
5.2.4 Burden of Proof

According to Section 16(3)(a) of the Contracts Act 1950, „where a person who is
in a position to dominate the will of another, enters into a contract with him, and
the transaction appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that the contract was not induced by
undue influence shall lie upon the person in a position to dominate the will of the
other.‰ For example:

Illustration (c)
A, being in debt to B, the moneylender of his village, contracts a fresh loan on

terms which appear to be unconscionable. It lies on B to prove that the
contract was not induced by undue influence.
In case where undue influence is shown to exist, the presumption of its exercise
can be rebutted by proof that the party reposing the confidence has formed a free
judgement and independent of any kind of control. The way to establish this is
by showing that the person has received independent legal advice and took it.
However, a transaction will also be upheld despite the absence of independent

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

Other important cases of undue influence are the case of:
Salwath Haneem v. Hadjee Abdullah (1894) 2 SSLR 57.
The plaintiffÊs husband executed a conveyance of property belonging to

himself and the plaintiff to his brothers, B and C. The plaintiff agreed to the
conveyance but after her husbandÊs death, she brought an action seeking to set
aside the agreement and the conveyance.
The Court held that: A confidential relationship existed between the plaintiff
and B and C. The burden of proof therefore lay on B and C to show that the
plaintiff fully understood the transaction and executed the conveyance freely
and without being subject to undue influence. Since B and C failed to
discharge the burden, the transaction was set aside.
And the case of:
Datuk Jaginder Singh & Ors. v. Tara Rajaratnam [1983] 2 MLJ 196.
The respondent was the registered proprietor of a land. She claimed that she
was induced by the fraud and undue influence of the 1st and 2nd appellant to
transfer her land to the 2nd appellant.
The Federal Court held that: The appellants and respondent were in a
solicitor-client relationship and the transaction was unconscionable.
Therefore, the burden was on the appellants to rebut the presumption of
undue influence. In this case, the appellants had not discharged that burden
and thus the transaction was set aside.
5.2.5 Effect of Undue Influence

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

SELF-CHECK 5.1
(a) What is meant by coercion?
(b) What are the important ingredients to establish undue
influence?
(c) What is the legal effect of a contract made under coercion and
undue influence?
(d) Who must prove that a contract is not induced by undue
influence?
(e) In what type of relationship a person is said to be in a position
to dominate the will of another in a contract?
(f) What is the importance of an independent legal advice in
undue influence cases?
ACTIVITY 5.1
Discuss the following cases by applying the principle of law on free

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

5.3 FRAUD
Fraud refers to acts committed by a party to a contract with the intent to deceive
the other contracting party. According to Section 17 of the Contracts Act 1950,
„Fraud includes any of the following acts committed by a party to a contract, or
with his connivance, or by his agent, with intent to deceive another party thereto
or his agent, or to induce him to enter into the contract:........‰
(a) „The suggestion, as to a fact, of that which is not true by one who does not
believe it to be true.‰
It means fraud will exist when the party to a contract is suggesting a fact
which is not true to another party, and he himself knows that the fact is not
true. In the case of:
Letchemy Arumugam v. Annamalay [1982] 2 MLJ 198,
The plaintiff, an illiterate Indian woman rubber tapper, claimed to

rescind the sale and purchase agreement made with the defendant on
the ground of fraudulent misrepresentation. According to the plaintiff,
she was induced to enter into the agreement whereby the defendant
had fraudulently represented to the plaintiff that she was signing for a
loan document and also other documents to free her land from a
charge. In actual fact, she was signing a sale agreement relating to her
land in Port Dickson.
The Court held: The evidence clearly showed that the defendant had
exercised fraud and therefore the plaintiff was entitled to rescind the
contract.
(b) „The active concealment of a fact by one having knowledge of belief of the
fact.‰
An example of this act is provided in the following illustration in Section 19

of the Contracts Act 1950.

Illustration (c)
B, having discovered a vein of ore on the estate of A, adopts means to conceal,

and does conceal, the existence of the ore from A. Through AÊs ignorance, B is
enabled to buy the estate at an undervalue. The contract is voidable at the
option of A.
(c) „A promise made without any intention of performing it.‰

(d) „Any other act fitted to deceive.‰
(e) „Any such act or omission as the law specially declares to be fraudulent.‰
Notwithstanding the above principles, Explanation to Section 17 states that,

„mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud.‰
Illustration (a), Section 17
A sells, by auction, to B, a horse which A knows to be unsound. A says

nothing to B about the horseÊs unsoundness. This is not fraud in A.
Illustration (d), Section 17
A and B, being traders, enter upon a contract. A has private information of a

change in prices which would affect BÊs willingness to proceed with the
contract. A is not bound to inform B.
An example of case to illustrate the principles:
In Keates v. Lord Cadogan (1851) 10 C.B. 591,
the plaintiff sued for damages arising from the defendantÊs fraud in letting to
the plaintiff a house which he knew to be required for immediate occupation
(without disclosing that it was in a ruinous condition).
The Court rejected the claim and held that there was nothing amounting to
deceit (fraud).

However, the same Explanation (Section 17) continues to provide that,

„......unless the circumstances of the case are such that, regard being had to them,
it is the duty of the person keeping silence to speak, or unless his silence is, in
itself, equivalent to speech."
The above statement means, there are circumstances in which failure by one
party to speak out may amount to fraud.
Firstly, where there is a legal duty to disclose the material facts (duty of
disclosure) to the other party in a contract. This duty arises where the
relationship between the contracting parties is in the nature of fiduciary
relationship, as in a solicitor-client relationship. For instance:
Illustration (b), Section 17
B is AÊs daughter and has just come of age. Here, the relation between the
parties would make it AÊs duty to tell B if the horse is sound.
Secondly, where silence is equivalent to speech. For instance:
Illustration (c), Section 17
B says to A, „If you do not deny it, I shall assume that the horse is sound.‰ A
says nothing. Here, AÊs silence is equivalent to speech.
(Here, the act of A keeping silence means, approving BÊs statement that the
horse is sound).
5.3.1 Effect of Fraud

Where there is element of fraud in a contract, the contract will become voidable
at the option of the party whose consent was so caused. Section 19(1) of the
Contracts Act 1950 provides that „when consent to an agreement is caused by
......., fraud, ........, the agreement is a contract voidable at the option of the party
However, according to Exception to Section 19 of the Contracts Act, 1950, „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.‰
This means, if the party who was deceived has the means or capable of
investigating the truth of the facts given by the other party, by taking reasonable
appropriate measures, then the untruth facts cannot render the contract void.
Thus, the contract cannot be rescinded. In the case of:
Tan Chye Chew & Anor v. Eastern Mining & Metals Co Ltd [1965] 1 MLJ
201,
The Court held that: The respondent had sufficient means to carry out his
own inspection or investigation in determining the truth of the facts in their
contract. Thus, there was no fraud on the appellantÊs part.
Further, Explanation to Section 19 also provides that, „a fraud or

misrepresentation which did not cause the consent to a contract of the party on
whom the fraud was practised; or to whom the misrepresentation was made,
does not render a contract voidable.‰
This means, the false statement does not give rise to a cause of action if it has not
induced or caused the other party to enter into the contract. The representee must
have relied on the statement of the representor. In the case of:
Mithoolal v. Life Insurance Corp of India AIR 1962 SC 814,
The Indian Supreme Court stated that: A false representation, whether

fraudulent or innocent, is irrelevant if it has not induced the party to whom
it is made to act upon it by entering into the contract.
The burden of proving fraud lies on the party making the claim.
5.4 MISREPRESENTATION
Misrepresentation refers to an untrue statement made by a representor and that
induces the other party to enter into a contract. Misrepresentation under Section
18 of the Contracts Act 1950 includes:

(a) „The positive assertion, in a manner not warranted by the information of

the person making it, of that which is not true, though he believes it to be
true.‰
(b) „Any breach of duty which, without an intent to deceive, gives an
advantage to the person committing it, or anyone claiming under him, by
misleading another to his prejudice, or to the prejudice of anyone claiming
under him.‰
(c) „Causing, however innocently, a party to an agreement to make a mistake
as to the substance of the thing which is the subject of the agreement.‰
In brief, misrepresentation is a representation of untrue or misleading

statement of fact, made by a party to the contract, to induce the other party
to enter into the contract. The difference between fraudulent
misrepresentation and misrepresentation under Section 18 is that,
misrepresentation under Section 18 is made without any intention to deceit.
In other words, a misrepresentation in which no element of fraud is
present. This is because the party making such a statement honestly
believes in the truth of the statement, or negligently or innocently makes
such statement which is untrue or causes another to make a mistake of fact.
It is important that the statement represented is a statement of fact and not

only a statement of opinion. In the case of:
Bisset v. Wilkinson [1927] AC 177,
The respondents agreed to purchase from the appellant certain lands

at Avondale, in the Southern Island of New Zealand, for the purpose
of sheep-farming. The respondents relied on the appellantÊs statement
that he estimated the lands to carry two thousand sheep. The
appellant had not, and no other person had at any time, carried on
sheep-farming on the lands in question. When the appellant claimed
the balance of the purchase price, the respondents counter-claimed to
rescind the contract on the ground of misrepresentation.
The Court held that: The statement was merely of an opinion which
the appellant honestly held. The claim to rescind the contract failed.
5.4.1 Effect of Misrepresentation

Where there is element of misrepresentation in a contract, the contract will
become voidable at the option of the party whose consent was so caused. Section
19(1) of the Contracts Act 1950 provides that „when consent to an agreement is
caused by ......., or misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused.‰
However, according to Exception to Section 19 of the Contracts Act, 1950, „if

such consent was caused by misrepresentation or ......., the contract, nevertheless,
is not voidable, if the party whose consent was so caused had the means of
discovering the truth with ordinary diligence.‰ For instance:
A, by a misrepresentation, leads B erroneously to believe that five hundred

gantangs of indigo are made annually at AÊs factory. B examines the accounts
of the factory, which show that only four hundred gantangs of indigo have
been made. After this, B buys the factory. The contract is not voidable on
account of AÊs misrepresentation.
Further, Explanation to Section 19 also provides that, „a ...... misrepresentation

which did not cause the consent to a contract of the party ........; to whom the
misrepresentation was made, does not render a contract voidable.‰
This means, the act of misrepresentation does not give rise to a cause of action if
it has not induced or caused the other party to enter into the contract. The
representee must have relied on the statement of the representor.
SELF-CHECK 5.2
(a) What is meant by fraud and misrepresentation?
(b) What is the difference between fraudulent misrepresentation
and innocent misrepresentation?
(c) What is the legal effect of a contract made under fraud and
misrepresentation?
(d) What is meant by Âsilence is no fraudÊ?
(e) Is there any exception to the above principle?
(f) Under what circumstance a contract cannot become voidable by
reason of fraud and misrepresentation?
(g) What is the implication of not exercising oneÊs ordinary
diligence to discover the truth of a statement made in a contract
under fraud and misrepresentation?

ACTIVITY 5.2
Discuss the following problems by applying the principles of law on
consent of the contracting parties:
(a) Tim is a mechanic who wishes to take a partner into his business.
During negotiations between Tim and Kyra, Tim states that the
income of the business is RM60,000 a year. The accounts which
Tim produces show that the income is not quite RM60,000 a year
and Kyra asks about the balance. Tim then produces further
accounts to show how the figure is made up. However, Kyra
does not examine the accounts in detail but agrees to become a
partner. Later, Kyra discovers the true position and seeks to
rescind the contract on the ground of fraud. Advise Tim.
(b) Jade was induced to lend money to a company by a
representation made by its directors that the money would be
used to improve the companyÊs buildings and generally expand
the business. In fact, the directors intended to use the money to
pay off the companyÊs existing debts because the creditors were
pressing hard for payment. Jade then discovered that she had
been misled and sought the legal advice to sue the directors for
damages for fraud and misrepresentation. Advise Jade.
5.5 MISTAKES
Mistake under the Contracts Act 1950 includes a mistake as to a matter of fact (by
one or both contracting parties) and mistake as to any law in force or not in force
in Malaysia. Sections 21 and 23 of the Contracts Act 1950 provide for the effect of
a contract entered into under a mistake of fact. Under Section 21, both parties to
the contract are under a mistake of fact, and under Section 23, only one of the
parties is under a mistake of fact which is essential to the contract made.
5.5.1 Mistake of Fact

According to Section 21, „where both parties to an agreement are under a
mistake as to a matter of fact essential to the agreement, the agreement is void.‰
And according to Section 23, „a contract is not voidable merely because it was
caused by one of the parties to it being under a mistake as to a matter of fact.‰
The above provisions provide that if the mistake of fact is done by both parties in
a contract, the contract will be void. But if the mistake is done by one of the

parties to a contract, then the contract will not be voidable. Examples of cases are
illustrated below:
Illustration (a), Section 21
A agrees to sell B a specific cargo of goods supposed to be on its way from

England to Kelang. It turns out that, before the day of the bargain, the ship
conveying the cargo had been cast away and the goods lost. Neither party was
aware of the facts. The agreement is void.
A agrees to buy from B a certain horse. It turns out that the horse was dead at
the time of the bargain, though neither party was aware of the fact. The
agreement is void.
Illustration (c), Section 21
A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead
at the time of the agreement, but both parties were ignorant of the fact. The
agreement is void.
Section 21 of the Contracts Act 1950 covers the English common law classification
of common mistake and mutual mistake. Common mistake occurs when both
parties make the same mistake as to the subject matter of the contract, while
mutual mistake occurs when both parties misunderstand each other. In the case
of:
Raffles v. Wichelhaus (1864) H&C 906,
Two parties agreed to a sale of a cargo of cotton arriving in London by a

ship called The Peerless, sailing from Bombay. But unknown to both
parties, there were two ships of the same name both leaving from Bombay
at different times. They were both negotiating under a mistake and had in
mind of different ships. Therefore, the contract of sale was ruled void for
mutual mistake.

Section 23 covers the unilateral mistake in English common law. The example of
case is:
Tamplin v. James (1898) 15 ChD 215,
B made a successful bid at an auction for the sale of a public house under
the mistaken belief that a certain field was included in the lot when in fact,
it was not. The contract was held to be valid by the English court.
5.5.2 Mistake of Law

Mistake of law is provided under Section 22 of the Contracs Act 1950. Section 22
states, „a contract is not voidable because it was caused by a mistake as to any
law in force in Malaysia; but a mistake as to a law not in force in Malaysia has the
same effect as a mistake of fact.‰
For example:
Illustration
A and B make a contract grounded on the erroneous belief that a particular

debt is barred by limitation: the contract is not voidable.
Thus, if the mistake is made by the contracting parties as to the law in force in
Malaysia, the contract is not voidable. But if the mistake is made as to the law not
in force in Malaysia, then the contract is void.
5.5.3 Mistake as to Document

A party who has made a mistake as to the nature of a document he has signed, is
bound by the terms of the contract.

In Subramaniam v. Retnam [1966] 1 MLJ 172,
The defendant had signed a written acknowledgment of a loan provided in

English language. Even if the defendant was ignorant of the language, he was
bound by the terms he had signed (provided there was no fraud or
misrepresentation).
However, there is an exception in English law that allows the defence of non est
factum, and the Malaysian courts applied the principle in the local cases. Non est
factum means Âit is not his deedÊ. Thus, it is a plea that the agreement is not the
act of the person. In the case of:
Awang bin Omar v. Haji Omar & Anor [1949] MLJ Supp 28,
The plaintiff and the second defendant entered into a contract and the
performance was guaranteed by the first defendant (who was induced by the
second defendant, to sign a document). The first defendant did not know
English and he was persuaded to sign in the mistaken belief that he was
merely witnessing his brotherÊs signature.
The High Court ruled: There was a mistake as to the nature of the document
signed and therefore, the first defendant was not liable.
5.5.4 Effect of Mistake

When a contract is void (for mistake), according to Section 66 of the Contracts
Act 1950, „any person who has received any advantage under the agreement is
bound to restore it or to make compensation for it to the person from whom he
received it.‰ An example is illustrated below:
Illustration (a)
A pays B $1,000 in consideration of BÊs promise to marry C (AÊs daughter). C

is dead at the time of the promise. The agreement is void, but B must repay A
the $1,000.

Section 30 of the Specific Relief Act, 1950 also provides remedy of rectification in
cases where the parties made a contract under a mistake and the contract does
not accurately record the true intention of the parties.
Section 30 states, „when, through fraud or a mutual mistake of the parties, a

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

SELF-CHECK 5.3
(a) What is the effect of a contract made under a mistake of fact?

(b) What is the difference between common/mutual mistake and
unilateral mistake?
(c) What is the effect of a contract made under a mistake of law?
(d) What is the meaning of the rule of non est factum?
(e) Is the English common law rule of non est factum apply to the
Malaysian cases?
(f) Is the remedy of rectification available in mistake cases?
ACTIVITY 5.3
Discuss the following cases by applying the principles of law on free
consent of the contracting parties:
(a) Nadia agrees to buy a camera and Hans agrees to sell the same.
Explain how the mistakes in the following would affect the
contract:
(i) Nadia believes that she is obtaining credit over four months
whereas Hans believes that it is a cash sale.
(ii) Nadia believes that he is buying from Vince and not from
Hans.
(b) Mr Sam advertised his ÂDurian OrchardÊ for sale. Kamal was
one of those who was interested in the orchard because he had
seen Mr Sam using the adjacent field to graze cows. Kamal
always wanted to graze cows that would bring him profit apart
from maintaining the orchard. Later, Kamal obtained the details
of the sale advertisement which clearly stated that the field in
question was not part of the sale since it did not belong to Mr
Sam. Kamal did not read this statement and believed that the
field would be included in the sale. Kamal then bought the
orchard from Mr Sam. After the sale was completed, Kamal
discovered that the field was not included in the sale and
intended to set aside the contract. Advise Kamal.

• Coercion is the act of committing or threatening to commit any act forbidden

by the Penal Code, with the intention to make the other party enter into a
contract.
• The effect of a contract made under coercion is voidable.
• To establish a contract made under undue influence requires the elements of
domination of will and obtaining unfair advantage.
• The burden of proving that the contract is not induced by undue influence is
on the person dominating the will of another.
• The presumption of undue influence can be rebutted by proving the other
party taking independent legal advice.
• Contracts made under undue influence will become voidable.
• Fraud covers an act committed by one contracting party with the intent to
deceive another.
• Mere silence is no fraud.
• Failure by one party to speak out will amount to fraud if there is a duty of
disclosure.
• Element of fraud makes the contract voidable.
• A contract under fraud is not voidable if the party being fraud had the means
of discovering the truth with ordinary diligence.
• A false statement which does not induce or cause the party to enter into a
contract does not render the contract voidable.
• Innocent misrepresentation in a contract is not made with the intention to
deceive but the contract is voidable.
• Mistake of fact will render a contract void if it is a common or mutual
mistake.
• Unilateral mistake does not render a contract voidable.
• A contract made under a mistake of law in force in Malaysia is not voidable.
• A contract which is void under a mistake of fact requires the party who has
received the advantage to restore it to the other party.
• The defence of non est factum is accepted in mistake cases but in exceptional
circumstances.
• Remedy of rectification is allowed in a contract made under mistake.
Coercion Mistake
Fiduciary relation Ordinary diligence
Fraud Real/apparent authority
Free consent Rectification
Mental capacity Undue influence
Misrepresentation Voidable contract
Text Books:
University Press.
Cases:
• Awang bin Omar v. Haji Omar & Anor [1949] MLJ Supp 28.
• Bisset v. Wilkinson [1927] AC 177.
• Che Som bt Yip & Ors v. Maha Pte Ltd & Ors [1989] 3 MLJ 468.
• Chin Nam Bee Development Sdn Bhd v. Tai Kim Choo & 4 Ors. [1988] 2 MLJ
117.
• Datuk Jaginder Singh & Ors. v. Tara Rajaratnam [1983] 2 MLJ 196.
• Keates v. Lord Cadogan (1851) 10 C.B. 591.
• Kesarmal s/o Letchman Das v. Valiappa Chettiar [1954] MLJ 119.
• Letchemy Arumugam v. Annamalay [1982] 2 MLJ 198.
• Lim Hong Shin v. Leong Fong Yew (1918) 2 FMSLR 187.

• Lloyds Bank, Ltd. v. Bundy [1975] QB 326.

• Mithoolal v. Life Insurance Corp of India AIR 1962 SC 814.
• Raffles v. Wichelhaus (1864) H&C 906.
• Salwath Haneem v. Hadjee Abdullah (1894) 2 SSLR 57.
• Subramaniam v. Retnam [1966] 1 MLJ 172.
• Tamplin v. James (1898) 15 ChD 215.
• Tan Chye Chew & Anor v. Eastern Mining & Metals Co Ltd [1965] 1 MLJ 201.
• Tate v. Williamson (1866) LR 2 Ch App 55.
• Tufton v. Sperni [1952] 2 T.L.R. 516.

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

TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) W 83
Figure 6.1: Elements that make consideration or object of an agreement unlawful
Whereas Section 27 of the Contracts Act considers an agreement which affects the
freedom and stability of marriage of any person as void. Section 28 makes an
agreement that restrains trade transaction as void agreement. The same also
applies to an agreement that restricts a person from enforcing his absolute rights
under any law or limits the time for a person to enforce his rights. These kinds of
agreements are regarded as void according to Section 29 of the Contracts Act,
1950.
6.1 CONTRACTS FORBIDDEN BY LAW AND IF

PERMITTED, DEFEAT THE LAW
Section 24(a) and (b), Contracts Act 1950.
Some statutes do not provide specific provisions concerning void or illegal

contract but some provide that failure to conform to any law provisions would
cause the contract to be void.
An example of this is Section 31 of the Contracts Act 1950 which states that any
wager contract is void and no legal action can be taken to recover money won
out of such wager. The same is also stressed out in Section 26 of Civil Law Act
1956. It provides that all agreements either made orally or written, by way of
gaming or wagering shall be null and void. No legal action can be taken to
recover money or valuable thing won out of the same.

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

In Tan Bing Hock v. Abu Samah [1968] 1 MLJ 221,
The defendant held a logging licence in Pahang under the Forest Rules 1935
which prohibited transfer without written approval from the District Forest
Officer. The defendant agreed to assign his rights under the licence (to extract
timber) to the plaintiff.
The Court held that: The contract was illegal.
6.2 FRAUDULENT CONTRACTS

Section 24(c), Contracts Act 1950
Any contract which its consideration or object is fraudulent is void. An example

of a fraudulent contract is found in the following illustration.
Illustration (e), Section 24
A, B and C enter into an agreement for the division among them of gains
acquired, or to be acquired, by them by fraud. The agreement is void, as its
object is unlawful.
6.3 CONTRACTS INJURIOUS TO PERSON OR

PROPERTY OF ANOTHER
Section 24 (d), Contracts Act 1950
Any contract which its consideration or object causes injury to person or

property of another is void under the law.
In the case of Syed Ahamed Alhabsyee v. Puteh bt Sabtu (1922) 5 FMSLR 243),
The defendant, who was a trustee of a piece of land belonging to a minor, had
agreed to sell it to the plaintiff. Since the sale of the land if allowed would
affect the interest of the minor, the Court held that the transaction was void.

6.4 CONTRACTS IMMORAL OR AGAINST

PUBLIC POLICY
Section 24(e), Contracts Act 1950
Any contract which its consideration or object is regarded as immoral or

opposed to public policy is void under the law.
Immoral Contracts
Illustration (k), Section 24
A agrees to let her daughter be hired to B for concubinage. The agreement is

void, because it is immoral, though the letting may not be punishable under
the Penal Code.
Public Policy
(a) Contracts prejudicial to the public service
Illustration (f), Section 24
A promises to obtain for B an employment in the public service, and B

promises to pay RM1,000 to A in return. Such an agreement is void as
the consideration is unlawful.
In Aroomogum Chitty v. Lim Ah Hang (1894) 2 SSLR 80,
The plaintiff initiated a claim for the refund of money he lent to a

brothel business.
The Court held that: The money lent for the purpose of brothel business
was not recoverable for illegality. The object of the agreement was
clearly immoral.

In the case of Parkinson v.College of Ambulance Ltd & Harrison

[1925] 2KB 1,
The secretary of the defendant charity promised to secure a

knighthood for the plaintiff if he would make an adequate donation.
He did with a promise of more should the knighthood be
forthcoming. He then sued for the return of the money when he did
not receive the honour.
(b) Contracts obstructing the course of justice
Illustration (h), Section 24
A promises B to drop a prosecution which he has instituted against B

for robbery, and B promises to restore the value of the things taken.
The agreement is void, as its object is unlawful.
(c) Contracts against the interests of the state

The kinds of contracts which are detrimental to the state and unlawful
include contracts to trade with the enemy of the state during war. The
reason for this is simply that it profits the enemy state and thus against
public policy.
In the case of Foster v. Driscoll [1929] 1 KB 470,
A partnership agreement between five persons with the intention to

smuggle whisky into the US was held as illegal.
(d) Contracts prejudicial to the freedom and stability of marriage

A contract is void if it restricts a personÊs ability to marry, or promotes any
act which weakens the stability of marriage. Also a contract between
spouses who are living together, that provides terms in the event of future
separation, is void because it encourages the parties to get into divorce.
Another kind of contract is a marriage brokerage contract to find a spouse
for a person in return for a fee; it is also void as against public policy.

SELF-CHECK 6.1
(a) When does the consideration or object of an agreement become
unlawful?
(b) What are the kinds of contracts regarded as opposed to public
policy?
(c) What is the status of a contract with unlawful object or
consideration?
ACTIVITY 6.1
(a) Joey, a remisier, paid RM20,000 to Harry, the Director of a few

listed companies, for Âinsider informationÊ which he intended to
use in determining how to invest his clientsÊ funds. Insider
trading is an offence under section 132A of the Companies Act,
1965. Harry has since failed to provide any information to Joey
and has indicated that he has no intention of ever doing so.
Advise Joey as to whether he could recover the RM20,000 paid to
Harry.
(b) Gesmar had brought into Malaysia certain jewellery which he

has failed to declare to the customs. He has also failed to pay
customs duty to the authority. Later, he filed a claim for
indemnity against the insurers for the loss of the jewellery at his
home through theft. Decide whether Gesmar could enforce the
contract of indemnity.
6.5 OTHER VOID CONTRACTS

The following provisions provide other kinds of contracts regarded as void:
(a) Section 25, Contracts Act 1950.

A contract is void if the consideration for one or more objects is in part
unlawful.

(b) Section 26, Contracts Act 1950.

A contract made without consideration is void except in the circumstances
provided.
(c) Section 27, Contracts Act 1950.

A contract in restraint of marriage of a person other than a minor is void.
(d) Section 28, Contracts Act 1950.

A contract in restraint of trade, profession or business is void except in
certain limited circumstances.
(e) Section 29, Contracts Act 1950.

A contract in restraint of legal proceedings is void except contracts to refer a
dispute to arbitration and certain written contracts relating to award of
scholarships by the Government.
(f) Section 30, Contracts Act 1950.

A contract that is uncertain is void.
(g) Section 31, Contracts Act 1950.

A contract by way of wager is void except a subscription or contribution
made in favour of certain prizes for horse-racing.
6.5.1 Contracts in Restraint of Trade

According to Section 28 of the Contracts Act 1950, „every agreement by which
anyone is restrained from exercising a lawful profession, trade or business of any
kind, is to that extent void.‰
In the case of Wrigglesworth v. Anthony Wilson [1964] MLJ 269,
The plaintiff entered into an agreement to restrain the defendant from

practising as an advocate and solicitor within five miles of Kota Bharu
town for a period of two years after the termination of his service contract
with his employer. Later, the defendant left the employment and set up a
practice in Kota Bharu town. The plaintiff applied for an injunction to
restrain the defendant from practising, in breach of the promise.
The Court held that: The restraint void.

Under common law, any contract that prevents a person from practising a
profession, trade or any lawful business is enforceable provided the restraint is
reasonable. In other words, English common law only invalidates contracts with
unreasonable restraint. However, in Malaysia, Section 28 clearly provides that a
contract which prevents a person from exercising lawful profession, trade or any
kind of business is void.
There are three exceptions under Section 28. Those exceptions are as follows:
(a) Exception 1
One who sells the goodwill of a business may agree with the buyer to
refrain carrying on a similar business, within specified local limits, so long
as the buyer, or any person deriving title to the goodwill from him, carries
on a like business therein: Provided that such limits appear to the court
reasonable, regard being had to the nature of the business.
(b) Exception 2
Partners may, upon or in anticipation of dissolution of the partnership,
agree that some or all of them will not carry on a business similar to that of
the partnership within such local limits.
(c) Exception 3
Partners may agree that some one or all of them will not carry on any
business, other than that of the partnership, during the continuance of the
partnership.
6.5.2 Contracts in Restraint of Legal Proceedings

According to Section 29 of the Contracts Act 1950, „an agreement whereby a
person is restricted from enforcing his rights under or in respect of any contract,
by the usual legal proceedings in the ordinary tribunal, or which limits the time
within which he may thus enforce his rights, is void to that extent.‰

In the case of Corporation Royal Exchange v. Teck Guan (1912) 2 FMSLR 92,
There was a clause in a fire insurance policy which stated:
„If the claim be made and rejected, and an action or suit be not commenced
within three months after such rejection, all benefit under this policy shall be
forfeited.‰
The Court held: This clause reduced the period within which an assured
might bring a suit for compensation to a period less than that sanctioned by
the limitation statute. Thus, the clause infringed section 28 of the Contracts
Enactment (now section 29, Contracts Act) and was to that extent, void.
There are three exceptions to the general rule, as follows:
(a) Exception 1
This section shall not render illegal a contract by which two or more
persons agree that any dispute which may arise between them in respect of
any subject or class of subjects shall be referred to arbitration, and that only
the amount awarded in the arbitration shall be recoverable in respect of the
dispute so referred.
(b) Exception 2
Nor shall this section render illegal any contract in writing, by which two or
more persons agree to refer to arbitration on any question between them
which has already arisen, or affect any law as to references to arbitration.
(c) Exception 3
Nor shall this section render illegal any contract in writing between the
Government and any person with respect to an award of a scholarship by
the Government wherein it is provided that the discretion exercised by the
Government under that contract shall be final and conclusive and shall not
be questioned by any court.
6.5.3 Effect of Contracts under Section 28 and 29

Contracts in restraint of trade and in restraint of legal proceedings are not void in
toto but only void to the extent of the restraints. This means, only the invalid part
of the contract is unenforceable but the rest of the contract will be enforceable.

6.6 CONSEQUENCES OF ILLEGALITY

The general rule at common law and under the Contracts Act 1950 is that the
courts will not enforce illegal contracts and assist the parties: ex turpi causa non
oritur actio (no action will arise from a wrong done). The consequences of
illegality do not apply to contracts in restraint of marriage, restraint of trade and
restraint of legal proceedings. Those contracts are void only to the extent of the
restraint.
In Seong Sam v. Goon Food On (1933-34) FMSLR 169,
The plaintiff bought a share in three tickets from the defendant. One of the
tickets won a prize which was not paid in full by the defendant. The plaintiff
sued for the balance but the defendant claimed illegality of the contract,
being a wager.
The Court held that: An agreement for the purchase of a share in a ticket in a
public lottery was illegal and not merely void. Therefore, the plaintiff was a
party to an illegal agreement and she could not maintain an action based on
the agreement.
Under the Contracts Act 1950, Section 66 which is regarded as restitutionary

provision, may be applied. Once a contract becomes void, restitution is possible
provided the illegality is not known to the party seeking it.
In Ahmad bin Udoh & Anor v. Ng Aik Chong [1970] 1 MLJ 82,
The respondent and the appellants entered into an agreement for a lease of
paddy field for a period of six years and $1500 was paid pursuant to the
agreement. The agreement was illegal, contravening section 3(1) of the
Paddy Cultivators Ordinance. Subsequently, the appellants refused to allow
the respondent to till the land. The respondent took a legal action to recover
the sum paid to the appellants and the appellants claimed illegality of the
agreement.
The Federal Court held that: The parties were ignorant of the fact that they
were executing an illegal agreement. Hence, Section 66 would apply and the
respondent was entitled to recover the deposit paid.

Contracts severable and not severable

In cases where the contract is illegal in part, it is either possible or not possible to
sever the illegal part from the rest. According to Section 25 of the Contracts Act
1950,
„if any part of a single consideration for one or more objects, or any one
or any part of any one of several considerations for a single object, is
unlawful, the agreement is void.‰
That means, if the considerations of the contract are partly lawful and partly
unlawful, the whole agreement is void if it is not possible to sever the
considerations. For example:
Illustration
A promises to supervise, on behalf of B, a legal manufacture of indigo and an

illegal traffic in other articles. For both jobs, A is promised a salary of $1,000 a
year. The agreement is void since the object of AÊs promise and the
consideration for BÊs promise being in part unlawful.
Accordingly, Section 58 provides,
„where persons reciprocally promise, firstly, to do certain things which

are legal, and secondly, under specified circumstances, to do certain other
things which are illegal, the first set of promises is a contract, but the
second is a void agreement.‰
This provision applies to contracts which are severable. For example:
Illustration
A agrees to sell a house to B and B agrees to buy it for $10,000. But if B uses it
as a gambling house, he will instead pay $50,000. The first set of reciprocal
promises for sale of the house at $10,000 is a contract while the second set is
void.

SELF-CHECK 6.2
(a) Can a contract be made to restrain a person from marrying

another?
(b) What is the effect of an uncertain contract?
(c) Is contract in restraint of trade enforceable?
(d) What are the exceptions to contract in restraint of legal
proceedings?
(e) Will the court assist the parties to an illegal contract?
(f) Can a party to an illegal contract apply for restitution under
Section 66 of the Contracts Act 1950?
ACTIVITY 6.2
Discuss the following problems by applying the relevant principles
of law:
(a) Robin, a milk roundsman was employed by Mr White to

deliver milk to his customers. Robin agreed that for one year
after leaving his job, he would not serve or sell milk or dairy
produce to persons who (within 6 months before he left
employment) were customers of his employer. Later, Robin left
his employment with Mr White in order to work as a
roundsman for West Dairies. Robin then took the same milk
round as he had worked when he was with Mr White. Decide
whether there was a breach of contract by Robin.
(b) Nothern was a manufacturer of machine guns and other

military weapons. He sold the business to a company, giving
certain undertakings which restricted his business activities.
The company was amalgamated with another company and
Nothern was employed by the new entity as managing
director. In his contract, Nothern agreed that for 25 years he
would not manufacture guns or ammunition in any part of the
world, and would not compete with the company in any way.
Decide whether this covenant regarding the business sold was
valid and enforceable.

• An agreement not enforceable by law is said to be void.

• Any contract which its consideration or object is fraudulent is void.
• Contract injurious to person or property of another is void.
• Immoral contracts and contracts opposed to public policy are void.
• A contract made without consideration is void.
• A contract in restraint of marriage of a person other than a minor is void.
• A contract that is uncertain is void.
• Contracts in restraint of trade and in restraint of legal proceedings are void to
the extent of the restraints.
• The courts will not enforce illegal contracts and assist the parties to the
contract.
• Restitution is possible provided the illegality is not known to the party
seeking it.
Illegal contracts Restraint of trade

Restitution Severable contracts
Restraint of legal proceeding Unlawful objects or considerations
Restraint of marriage Void contracts
Text Books:
University Press.

Cases:
• Ahmad bin Udoh & Anor v. Ng Aik Chong [1970] 1 MLJ 82.
• Aroomogum Chitty v. Lim Ah Hang (1894) 2 SSLR 80.
• Chung Khiaw Bank Ltd. v. Hotel Rasa Sayang Sdn. Bhd. & Anor [1990] 1 MLJ
356.
• Corporation Royal Exchange v. Teck Guan (1912) 2 FMSLR 92.
• Foster v. Driscoll [1929] 1 KB 470.
• Hee Cheng v. Krishnan [1955] MLJ 103.
• Parkinson v.College of Ambulance Ltd & Harrison [1925] 2KB 1.
• Rasiah Munusamy v. Lim Tan & Sons Sdn Bhd [1985] 2 MLJ 291.
• Seong Sam v. Goon Food On (1933-34) FMSLR 169.
• Syed Ahamed Alhabsyee v. Puteh bt Sabtu (1922) 5 FMSLR 243).
• Tan Bing Hock v. Abu Samah [1968] 1 MLJ 221.
• Wrigglesworth v. Anthony Wilson [1964] MLJ 269.

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

98 X TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)
(c) Discharge by impossibility ; or

(d) Discharge by breach
7.1 DISCHARGE BY CONSENT OR AGREEMENT

BETWEEN PARTIES
A contract that is created by consent can be discharged by consent. Consent may
be given at the time of the contract or subsequently. For example, the parties may
agree at the time of making the contract that on the occurence of an event, the
contract will be discharged. Consent given subsequent to the contract may be a
waiver, release, novation, remission or rescission. Sections 63 and 64 of the
Contracts Act 1950 provide for the discharge of contract by consent.
7.1.1 Novation, Rescission and Alteration

According to Section 63 of the Contracts Act 1950,
„if the parties to a contract agree to substitute a new contract for it, or to rescind
or alter it, the original contract need not be performed.‰
Novation is the substitution or replacement of a new contract for an earlier one.

The effect of novation is to release the obligation of the parties under the earlier
contract. For example:
Illustration (a)
A owes money to B under a contract. It is agreed between A, B and C that B

shall henceforth accept C as his debtor, instead of A. The old debt of A to B
is at an end, and a new debt from C to B had been contracted.
The consideration for the new agreement is the mutual discharge of the original
contract and consent of all parties is secured. For example:

TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) W 99
Illustration (c)
A owes B $1,000 under a contract. B owes C $1,000. B orders A to credit C with

$1,000 in his books, but C does not assent to the agreement. B still owes C
$1,000, and no new contract has been entered into.
An example of alteration of a contract, as follows:
Illustration (b)
A owes B $10,000. A enters into arrangement with B, and gives B a mortgage

of his (AÊs) estate for $5,000 in place of the debt of $10,000. This is a new
contract and extinguishes the original contract.
7.1.2 Remission of Performance

Section 64 of the Contracts Act 1950 provides
„every promisee may dispense with or remit, wholly or in part, the performance
of the promise made to him, or may extend the time for such performance, or
may accept instead of it any satisfaction which he thinks fit.‰
The provision allows the party to remit the performance of the contract, which
will apply to the following situations:
(a) Payment of a lesser sum in satisfaction of a larger sum. For example:
Illustration (b)
A owes B $5,000. A pays to B, and B accepts, in satisfaction of the whole

debt, $2,000 paid at the time and place at which the $5,000 were
payable. The whole debt is discharged.

(b) Payment of a lesser sum by a third party to satisfy a larger debt.
Illustration (c)
A owes B $5,000 and a third party, C, pays to B $1,000 and B accepts

them in satisfaction of his claim on A. This payment discharge the
whole claim.
(c) Payment accepted in satisfaction of an unascertained sum.
Illustration (d)
A owes B under a contract, a sum of money, the amount of which has

not been ascertained. A, without ascertaining the amount, gives to B,
and B, in satisfaction thereof, accepts the sum of $2,000. This is a
discharge of the whole debt, whatever may be its amount.
(d) An arrangement between a debtor and his creditors to settle debts.
Illustration (e)
A owes B $2,000, and is also indebted to other creditors. A makes an

arrangement with his creditors, including B, to pay them a composition
of fifty cents in the dollar upon their respective demands. Payment to B
of $1,000 is a discharge of BÊs demand.
A case to illustrate further the application of the provision:
Kerpa Singh v Bariam Singh [1966] 1 MLJ 38
A third party, the son of the appellant debtor, made an offer of $4,000 to
the creditorÊs solicitor in discharge of $8,650 (on the condition that the
creditor could either return the cheque to the offeror or retain it and
discharge the debtorÊs debt).
The Court held: The creditorÊs conduct in cashing the cheque and
retaining the money would be considered an agreement to discharge
the debtor from any futher liability.

7.2 DISCHARGE BY PERFORMANCE

A contract is said to be discharged when the parties to the contract has
performed what they have agreed to do in the contract. Section 38(1) of the
Contracts Act, 1950, provides that „the parties to the contract must either
perform, or offer to perform, their respective promises, unless such performance
has been dispensed with or excused under this Act or of any other law.‰
Further, Section 38(2) of the Contracts Act 1950 provides,
„promises bind the representatives of the promisors in case of the death of the
promisors before performance, unless a contrary intention appears from the
contract.‰
The following illustrations explain the provision:
Illustration (a)
A promises to deliver goods to B on a certain day on payment of RM1,000.

A dies before that day. A's representatives are bound to deliver the goods
to B, and B is bound to pay the RM1,000 to A's representatives.
Illustration (b)
A promises to paint a picture for B by a certain day, at a certain price. A

dies before the day. The contract cannot be enforced either by A's
representatives or by B.
Meanwhile, Section 40 of the Contracts Act 1950 provides,
„when a party to a contract has refused to perform, or disabled himself from

performing, his promise in its entirety, the promisee may put an end to the
contract, unless he has signified, by word or conduct, his acquiescence in its
continuance.‰
It means that with the promiseeÊs consent, a contract will continue to exist even
though promisorÊs act has already amounted to a breach of the contract.

7.2.1 Time and Place of Performance

Parties to the contract must perform their obligations according to the time and
place that they have agreed in the contract. Otherwise, the contract is voidable at
the option of the promisee. According to Section 47 of the Contracts Act 1950,
„where, by the contract, a promisor is to perform his promise without application

by the promisee, and no time for performance is specified, the engagement must
be performed within a reasonable time.‰
The question "what is a reasonable time" is, in each particular case, a question of
fact.
In Section 48,
„when a promise is to be performed on a certain day, and the promisor has

undertaken to perform it without of application by the promisee, the promisor
may perform it at any time during the usual hours of business on the day and at
the place at which the promise ought to be performed.‰
For instance:
Illustration
A promises to deliver goods at B's warehouse on 1st of January. On that day,

A brings the goods to B's warehouse, but after the usual hour for closing it,
and they are not received, A has not performed his promise.
And according to Section 49,
„when a promise is to be performed on a certain day, and the promisor has not
undertaken to perform it without application by the promisee, it is the duty of
the promisee to apply for performance at a proper place, and within the hours of
business.‰

Whether time of performance is to be „of the essence‰ of the contract, is stated in

the case of:
Yeoh Kim Pong (Realty) Ltd v Ng Kim Pong [1962] MLJ 118
In this case, the developer appellant was supposed to perform certain

obligations for the respondent. Nevertheless, the appellant delayed in
performing their obligation. Although the appellant was late, the
respondent allowed the delivery dates to pass by agreeing to the work
being done by the appellant and by further ordering extra work.
Held: The respondent cannot rescind the contract because he had waived
his right to do so by allowing the appellant to still perform the obligation
after the time had passed. Thus, the respondent had to treat the contract as
subsisting.
The statement of the Lordships: „if in a contract in which time is of the

essence, a party fails to perform it by the stipulated time, the innocent
party has the right either to rescind the contract, or to treat it as still
subsisting. If he treats it either expressly or by conduct as still continuing,
the contract exists but time ceases to be of the essence and becomes at
large‰.
Place of performance of a contract is provided under Section 50 of the Contracts

Act 1950 which provides „where no place is specified for performance, and the
promise is to be performed without application by the promisee, it is the duty of
the promisor to ask the promisee where he would like the contract to be
performed.‰ For instance:
Illustration
If A undertakes to deliver a thousand gantangs of rice to B on a fixed day, A

must apply to B to appoint a reasonable place for the purpose of receiving it,
and must deliver it to B at that place.

7.2.2 Performance of Reciprocal Promise

„when a contract consists of reciprocal promises to be simultaneously performed,

no promisor need perform his promise unless the promisee is ready and willing
to perform his reciprocal promise.‰
A case to explain the provision:
Central Malaysia Development Ltd v Chin Pak Chin [1967] 2 MLJ 174
There was an agreement for the sale of land where the defendant-vendor was
to execute a valid transfer and deliver vacant possession of the land to the
plaintiff upon paying the deposit.
Held : They were reciprocal promises to be performed simultaneously because

the plaintiff was ready and willing to perform. Since the defendant could not
give vacant posession by the due date, the defendant was in breach, which
entitled the plaintiff to repudiate the contract and obtain the return of the
deposit.
7.2.3 Performance by Third Party

Section 41 of the Contracts Act 1950, states,
„if it is the intention of the parties that the contract should be performed by the
promisor himself, then it must be performed by him personally.‰
However according to Section 42, „if a promisee accepts performance of the

promisee from a third party, he cannot afterwards enforce it against the
promisor.‰ In the case of:

Chin Swee Onn v Puchong Realty Sdn. Bhd [1990] 1 MLJ 108
The parties agreed to transfer land to each other, the consideration for
the appellantÊs parcel being $25,000 and that of the respondentÊs, $14,000.
It was also agreed that the difference of $11,000 would be settled by two
sons of the respondent; one would be responsible for $4,000 and the
other for $7,000. The $7,000 was not paid and the appellant thereupon
claimed payment from the respondent.
Held: As the appellant had agreed to accept performance of the promise

from the third party, he could not under Section 42 of the Contracts Act
1950, enforce it against the respondent.
7.3 DISCHARGE BY IMPOSSIBILITY

Impossibility of performance covers two situations. Impossibility at the time a
contract is made and impossibility after it has been made.
Impossibility at the time a contract is made (under Section 57(1)) means, an

agreement to do an act impossible in itself, which is void. For example:
Illustration (a)
An agreement to discover treasure by magic is void.
Impossibility after a contract has been made (under Section 57(2)) means, a
contract becomes impossible to perform subsequent to their making. Section
57(2) of the Contracts Act 1950 states,
„a contract to do an act which, after the contract is made, becomes impossible, or

by reason of some event which the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or unlawful.‰
This principle covers the doctrine of frustration in common law. The frustration
doctrine is applied on the ground that there is supervening impossibility which
causes the whole purpose of a contract to be different from what was undertaken
by the contract or its performance has become unlawful. Therefore, frustration
refers to circumstances that occur, where there is no default by the contracting

parties to perform their contractual obligations. Supervening impossibility will

discharge a contract.
The circumstances under which a contract may be discharged by supervening

impossibility are as follows:
(a) Destruction of the subject-matter of the contract. Example of cases:
Taylor v. Caldwell (1863) B&S 826.
The defendant agreed to let the claimant have the use of a music hall
for the purpose of holding four concerts. Before the first concert was
due to be held, the hall was destroyed by fire without negligence by
any party. The claimant sued for damages for wasted advertising
expenses.
Held: The contract was impossible of performance and the defendant

was not liable.
H A Berney v Tronoh Mines Ltd [1949] MLJ 4
Held: the contract of employment was discharged by frustration on

the outbreak of war when Japan invaded Malaya.
(b) Supervening events defeat the whole purpose or object of the contract. As
in the case of:
Krell v Henry [1903] 2 KB 740
The claimant owned a room overlooking the proposed route of the Coronation
procession of Edward VII, and had let it to the defendant for the purpose of
viewing the procession. The procession did not take place because of the
KingÊs illness. The claimant sued for the agreed fee.
Held: The defendant could be excused from paying rent for the room as the
contract was frustrated. The fact that the procession had been cancelled
discharged the parties from their obligations, since it was no longer possible to
achieve the real purpose of the agreement.

(c) Death or personal incapacity of a party to the contract. Under this

circumstance, the party to the contract has undertaken a personal
obligation. Therefore, personal qualification and skill of the person are the
basis of the contract.
(d) Supervening illegality.This refers to a contract where its performance

becomes unlawful, due to a change in the law. A case for instance:
Lee Kin v. Chan Suan Eng [1933] MLJ 197
Held: A lease for five yearly renewals was frustrated by the

enactment of a new law prescribing annual renewals.
7.3.1 Effect of Frustration

When a contract is automatically terminated by reason of frustration, the contract
becomes void and Section 66 of the Contracts Act 1950 applies. According to
Section 66,
„when an agreement is discovered to be void, or when a contract becomes void,

any person who has received any advantage under the agreement or contract is
bound to restore it, or to make compensation for it, to the person from whom he
received it.‰
For example:
Illustration (d)
A contracts to sing for B at a concert for RM1,000, which are paid in advance.
A is too ill to sing. A is not bound to make compensation to B for the loss of
the profits which B would have made if A had been able to sing, but must
refund to B the RM1,000 paid in advance.
Section 15 of the Civil Law Act 1950 (Revised 1972) is also relevant to frustration
contract. Section 15(2) provides that money due but not paid before frustration
ceases to be payable. But if the money has actually been paid, it must be restored.
If the party in the contract has incurred expenses in performing the contract

before frustration, the court has the discretion to order payment not exceeding
the amount of the said expenses.
7.4 DISCHARGE BY BREACH

Section 40 of the Contracts Act 1950 states,

performing, his promise in its entirety, the promisee may put an end to the
contract, unless he has signified, by words or conduct, his acquiescence in its
continuance.‰
This means, when a promisor fails to perform his obligations or to tender

performance, there is a breach of the contract which entitles the party not in
breach to take appropriate action which may include repudiation. For example:
Illustration (a)
A is a singer, enter into a contract with B, the manager of the theatre, to sing
at his theatre two nights in every week during the next two months, and B
engages to pay her $100 for each nightÊs performance. On the sixth night, A
wilfully absents herself from the theatre. B is at liberty to put an end to the
contract.
In the case of:
Ban Hong Joo Mine Ltd v. Chen & Yap Ltd [1969] 2 MLJ 83
Held: The deliberate refusal of the appellants to make fortnightly

payments for work already done and their order to the respondents to
stop work left the respondents with no option but to treat the contract as
having been repudiated, and to sue for payment for the work which had
been done.
The party not in breach has the option either to continue or repudiate the
contract. If the party not in breach chooses to continue with the contract, the
obligation of both parties sustains and the party not in breach could still claim for
damages. As illustrated below:

Illustration (b)
A, a singer, enters into a contract with B, the manager of a theatre, to sing at
his theatre two nights in every week during the next two months, and B
engages to pay her at the rate of $100 for each night. On the sixth night, A
wilfully absents herself. With the assent of B, A sings on the seventh night. B
has signified his acquiescence in the continuance of the contract, and cannot
now put an end to it, but is entitled to compensation for the damage sustained
by him through A's failure to sing on the sixth night.
SELF-CHECK 7.1
(a) How can a contract be discharged?
(b) What is the effect of novation?
(c) Under what situations remission of performance is allowed to
the party in contract?
(d) Is time of performance essential in a contract?
(e) Can the performance of a contract be done by a third party?
(f) What is the meaning of frustration in contract?
(g) What are the circumstances under which a contract may be
discharged by supervening impossibility?
(h) What is the effect of frustration?
(i) What is meant by breach that entitles the party to discharge a
contract?
ACTIVITY 7.1
Discuss the following problems by applying the relevant principles

of law:
(a) An action was brought by Mr Fernando for damages for non-
acceptance of 5,200 bags of Moghul rice by Mr Roshan. The
sold note stated that the rice was to be shipped during the
months of November and/or December 2007. A total of 5,100
bags was put on board ship on 31 October 2007, and the
remaining 100 bags on 3 November 2007. Mr Roshan refused to
take delivery because the rice was not shipped in accordance
with the terms of their contract. Discuss the rights of Mr
Fernando and Mr Roshan in the above contract.

(b) Edward agreed to let Daw to have a room for the purpose of
viewing the Parade for Visit Malaysia Year 2007 on 1 September
2007, for RM550. The contract provided that the money payable
immediately. The procession did not take place because of heavy
rain and flood. Daw who had paid RM300 on account, left the
balance unpaid. Daw sued to recover the RM300 and Edward
counter-claimed for RM250. Advise the parties on their rights in
the above contract.
(c) Steve agreed in April 2007 to engage Smith as a courier for

Malaysian travel, his duties to commence on 1 June 2007. On 11
May 2007, Steve wrote to Smith saying that he no longer required
SmithÊs services. Feeling unsatisfied, Smith decided to commence
an action for breach of contract on 22 May 2007. Steve contended
that there was no cause of action until the date due for
performance. Advise Smith.
7.5 REMEDIES
In cases of breach of contract, the party not in default may claim one or more of
the following remedies:
(a) Rescission of contract
(b) Damages
(c) Specific Performance
(d) Injunction
(e) Quantum Meruit
7.5.1 Rescission of Contract

Under Section 40 of the Contracts Act 1950,

performing, his promise, the promisee may put an end to the contract.......‰
It means that a non-performance of a contract by any of the party to the contract

will entitle the other party to rescind the contract.

7.5.2 Damages
The claim for damages in cases of breach of contract is provided under Sections
74 to 76 of the Contracts Act 1950. Section 74 provides the measure of damages
recoverable by the claimant. This section re-enacts the common law rule in the
case of Hadley v. Baxendale (1854) 9 Ex 341. The rule provides that an injured
party is entitled to the following:
(a) Damages arising naturally, that is, according to the usual course of things
resulting from the breach.
Lee Hin v. Mohamed Abubakar [1958] MLJ 25
Held: The loss which arises naturally resulting from the breach by the
defendant is the loss of plaintiffÊs profit which is usually the difference
between the contract price and the market price.
(b) If the party is claiming special damages for loss, he must show that the
other party knew at the time of making the contract that the special loss is
likely to result from the breach. This is explained in the case of:
East Asiatic Co. Ltd v. Othman [1966] 2 MLJ 38
The defendant agreed to buy the plaintiffÊs car for RM6,390. However,
the defendant committed breach and the plaintiff had to sell his car to
another company at a cheaper price, RM4,477.69. Plaintiff later claimed
damages amounting to RM1,912.31, being the difference between the
selling price that he could get from the defendant and the actual selling
price that he acquired from another company.
Held: Plaintiff was entitled to that amount.

Tham Chew Toh v. Associated Metal Smelters Ltd [1972] 1 MLJ 171
The defendant-appellant had agreed to sell a metal melting furnace

to the plaintiff-respondent, and giving an undertaking that the
melting furnace would have a temperature of not lower than 2,600
degrees F. This specification was not fulfilled and consequently, the
respondent brought an action alleging breach of condition and
claimed damages, including loss of profits.
Held: The appellant would not normally be liable for payment of

damages for loss of profits unless there was evidence that the special
object of the furnace had been drawn to their attention and they had
contracted on the basis that delay in delivery would make them
liable to payment for loss of profits.
Since the appellant knew of the requirement to deliver a furnace

capable of producing the specified temperature and the urgency of
delivery, they were liable to pay for certain loss of profits suffered by
the respondent.
(c) The compensation given is not for any remote and indirect loss or damage
sustained as a result of the breach.
Mitigation of loss
It is also the duty of the party to take reasonable steps to mitigate losses flowing
from a breach. If the party has failed to mitigate losses, he cannot later recover
any loss flowing from his neglect. A case to illustrate this:

Kabatasan Timber Extraction Co. v. Chong Fah Shing [1969] 2 MLJ 6
The respondent had purchased timbers, which were to be delivered to a

sawmill from the appellant. However, instead of delivering it to the
sawmill, the appellant left it 500 feet away from the sawmill. Thus, the
respondent had made a second purchase from other sources to make good
the shortage.
Held: It was the duty of the respondent to take reasonable steps to mitigate
the damages caused by the appellant. There was „no need for the
respondent to have gone to the expense and trouble of buying logs from
elsewhere when the logs were lying a few hundred feet away and all that
required was additional expense for hauling them up to the sawmill.‰
Therefore, the court reduced the damages awarded to the respondent.
Classification of Damages
Substantial It is a pecuniary compensation that put the plaintiff in the

position he would have enjoyed if the contract had been
performed.
Nominal Small token of award that is given when the plaintiff has
proved there is a breach, but he did not suffer actual loss.
Exemplary A sum awarded which is far greater than the actual

pecuniary loss suffered by the plaintiff. It is commonly
given upon the breach of any duty that has been prescribed
by the statute.
Liquidated Damages Damages that may be assessed by mere arimethic

calculation.
Unliquidated Damages Damages that cannot be ascertained.
7.5.3 Specific Performance

Specific performance is a discretionary remedy granted by the court. It is a decree
of the court directing that the contract shall be performed specifically according
to its terms. The remedy is granted under the Specific Relief Act 1950. Section
11(1) of the Specific Relief Act 1950 provides that, specific performance may be
granted by the court in the following circumstances:

(a) When the act agreed to be done is in the performance, wholly or partly, of a
trust.
Illustration
A holds certain stock in trust for B. A wrongfully disposes of the stock.

The law creates an obligation on A to restore the same quantity of stock
to B, and B may enforce specific performance of this obligation.
(b) When there exists no standard for ascertaining the actual damage caused by
the non-performance of the act agreed to be done.
Illustration
A agrees to buy, and B agrees to sell, a picture by a dead painter and

two rare China vases. A may compel B specifically to perform this
contract, for there is no standard for ascertaining the actual damage
which would be caused by its non-performance.
(c) An act agreed to be performed is such that its non-performance would not
afford adequate relief.

Illustrations
(i) A contracts with B to sell him a house for RM1,000. B is entitled to a

decree directing A to convey the house to him, he paying the purchase-
money.
(ii) In consideration of being released from certain obligations imposed on it

by its Act of Incorporation, a railway company contracts with Z to make
an archway through their railway to connect lands of Z served by the
railway, to construct a road between certain specified points, to pay a
certain annual sum towards the maintenance of this road, and also to
construct a siding and a wharf as specified in the contract. Z is entitled to
have this contract specifically enforced, for his interest in its performance
cannot be adequately compensated for by money; and the court may
appoint a proper person to superintend the construction of the archway,
road, siding, and wharf.
(iii) A contracts to sell, and B contracts to buy, a certain number of railway-

shares of a particular description. A refuses to complete the sale. B may
compel A specifically to perform this agreement, for the shares are limited
in number and not always to be had in the market, and their possession
carries with it the status of a shareholder, which cannot otherwise be
procured.
(iv) A contracts with B to paint a picture for B, who agrees to pay therefor
RM1,000. The picture is painted. B is entitled to have it delivered to him
on payment or tender of the RM1,000.
(d) When it is probable that pecuniary compensation cannot be obtained for the
non-performance of the act agreed to be done.
Illustration
A transfers without endorsement, but for valuable consideration, a promissory

note to B. A becomes insolvent, and C is appointed as his assignee. B may
compel C to endorse the note, for C has succeeded to A's liabilities and a decree
for pecuniary compensation for not endorsing the note would be fruitless.
Further, Section 20(1)(a) of the Specific Relief Act 1950 clearly states that specific
performance will not be granted where monetary compensation is adequate.

7.5.4 Injunction
Injunction as a remedy is classified under Part III of the Specific Relief Act 1950
as ÂPreventive ReliefÊ. It is granted at the discretion of the court and it can be
either ÂtemporaryÊ or ÂperpetualÊ (Section 50).
Section 51 of the Specific Relief Act 1950 explains the injunctions as follows:
1. Temporary injunctions (or interlocutory or interim injunction) are to

continue until a specified time, or until the further order of the court. They
may be granted at any period of a suit, and are regulated by the law
relating to civil procedure.
2. A perpetual injunction (or permanent injunction) can only be granted by

the decree made at the hearing and upon the merits of the suit; the
defendant is thereby perpetually enjoined from the assertion of a right, or
from the commission of an act, which would be contrary to the rights of the
plaintiff.
The temporary injunction is granted by the court to preserve the status quo
pending the resolution of a legal action. A perpetual injunction can only be
granted after a full trial and upon the merits of a case, and the defendant is
permanently prohibited from doing the act or asserting a right for which the
injunction was granted. In the case of:
Neoh Siew Eng & Anor v. Too Cheng Kwong [1963] MLJ 272
Held: The court granted a perpetual injunction by ordering the defendant

who was a landlord of the plaintiff to keep all communication pipes in
proper repair and to comply with all regulations of the Waterworks
Department so that water supply to the premises rented by the plaintiffs
would not be disconnected.
Further principles in Section 55 of the Specific Relief Act 1950 provides that
where a contract consists of affirmative agreement and negative agreement, the
court cannot compel specific performance of the affirmative agreement but shall
grant injunction to perform the negative agreement. For instance:

Illustration
A contract with B to sing for twelve months at BÊs theatre and not to sing
elsewhere. B cannot obtain specific performance of the contract to sing but he
may be able to secure an injunction to restrain A from singing at any other
place of public entertainment.
An example of case:
Pertama Cabaret Nite Club Sdn. Bhd v. Roman Tam [1981] 1 MLJ 149
A singer had signed a contract to appear and sing at the appellantÊs night
club for a number of days, and the contract provided that in the event of a
breach, the respondent should not perform in Kuala Lumpur during the
fixed period of the contract. Later, the singer dishonoured the contract by
singing in a rival club. The court had granted an interlocutory injunction.
7.5.5 Quantum Meruit

This remedy means that the claimant will be awarded as much as he has earned
or deserved. The remedy can be used contractually or quasi-contractually.
Contractually, quantum meruit may be used to recover a reasonable price or

remuneration where there is a contract for the supply of goods or services but the
parties have not fixed any precise sum to be paid.
Quasi-contractually, a claim of quantum meruit may be made where, for

instance, work has been done under a void contract. The claimant cannot recover
damages for breach because no valid contract exists, but he may recover on a
quantum meruit basis.

In the case of Craven-Ellis v. Canons Ltd [1936] 2 All ER 1066,
The claimant was employed as managing director by the company under a

deed which provided for remuneration. The articles provided that directors
must have qualification shares, and must obtain these within two months of
appointment. The claimant and other directors who appointed him never
obtained the required number of shares so that the deed was invalid.
However, the claimant had rendered services, and he now sued on a quantum
meruit for a reasonable sum by way of remuneration.
Held: He succeeded on a quantum meruit, there being no valid contract.
SELF-CHECK 7.2
(a) What are the remedies available to the parties in a contract?

(b) Can the plaintiff claim damages more than the amount of his
actual loss?
(c) What is the importance of mitigating losses in claim for
damages?
(d) When will the court grant the remedy of specific performance?
(e) In what circumstance specific performance is not to be granted?
(f) What is injunction?
(g) What is the difference between temporary injunction and
perpetual injunction?

ACTIVITY 7.2
Discuss the following problems by applying the relevant principles of

law:
(a) AG Sdn Bhd (AGSB) has been awarded a tender to supply sugar
for Yummy Biscuits Factory (YBF) for 2 years. According to the
agreement, AGSB has to deliver 500 bags of sugar every month to
the factory. Last month, AGSB managed to deliver only 200 bags of
sugar and due to that, YBF has to reduce their production and
reject orders from the customers. Advise YBF whether they can
claim damages from AGSB.
(b) On 3rd December 2007, Kenchana agreed to deliver a new boilder
to Dewi in two months time but she had failed to do so. Kenchana
had delivered the said boiler 12 weeks later, after the two months
period for delivery due. As a result, Dewi lost her normal business
profits during the period of delay and also the profits from dyeing
contracts which were offered to her during the period. Dewi now
wished to claim damages from Kenchana for her losses. Can she
succeed? Discuss.
(c) Cempaka, a distinguished actress, had entered into a contract in
which she agreed to act exclusively for the film company (Famous
Production) for 18 months. Subsequently, she was anxious to
obtain more money and thus she left Famous Production to enter
into a contract with another film company, Starhill Production.
Famous Production found out about this and asked for an
injunction to restrain Cempaka from carrying out the contract with
Starhill Production. Advise Famous Production on its chance of
success.
• When a contract is terminated, it is said to be discharged and the contracting

parties are free from further obligations arising from it.
• A contract that is created by consent can be discharged by consent.
• The effect of novation is to release the obligation of the parties under the
earlier contract.

• A contract is said to be discharged when the parties to the contract has

performed what they have agreed to do in the contract.
• An agreement to do an act impossible in itself is void.
• An injured party is entitled to damages arising naturally resulting from the
breach.
• A claim for special damages requires the party to show that the other party
knows that the special loss is likely to result from the breach.
• There is a general duty requiring that reasonable steps must be taken to
mitigate losses flowing from a breach.
• Specific performance is a discretionary remedy granted by the court.
• Injunction as a remedy is classified as ‘Preventive Relief’.
Agreement Injunction
Breach Performance
Damages Quantum Meruit
Discharge of contract Remedies
Frustration Specific performance
Text Books:
• Wu M. A. & Vohrah B. (2000). The Commercial Law of Malaysia (2nd ed.).
Cases:
• Ban Hong Joo Mine Ltd v. Chen & Yap Ltd [1969] 2 MLJ 83.

• Central Malaysia Development Ltd v Chin Pak Chin [1967] 2 MLJ 174.
• Chin Swee Onn v Puchong Realty Sdn. Bhd [1990] 1 MLJ 108.
• East Asiatic Co. Ltd v. Othman [1966] 2 MLJ 38.
• H A Berney v Tronoh Mines Ltd [1949] MLJ 4.
• Hadley v. Baxendale (1854) 9 Ex 341.
• Kabatasan Timber Extraction Co. v. Chong Fah Shing [1969] 2 MLJ 6.
• Kerpa Singh v Bariam Singh [1966] 1 MLJ 38.
• Krell v Henry [1903] 2 KB 740.
• Lee Hin v. Mohamed Abubakar [1958] MLJ 25.
• Lee Kin v. Chan Suan Eng [1933] MLJ 197.
• Neoh Siew Eng & Anor v. Too Cheng Kwong [1963] MLJ 272.
• Pertama Cabaret Nite Club Sdn. Bhd v. Roman Tam [1981] 1 MLJ 149.
• Taylor v. Caldwell (1863) B&S 826.
• Tham Chew Toh v. Associated Metal Smelters Ltd [1972] 1 MLJ 171.
• Yeoh Kim Pong (Realty) Ltd v Ng Kim Pong [1962] MLJ 118.

Topic X Law of
8 Agency
(Part 1)
LEARNING OUTCOMES
1. Define the meaning of agency;
2. Explain the purpose of agency contract;
3. Describe the types of agency contract;
4. Identify the statutory requirement for creation of agency contract; and
5. Discuss the scope of authority of the agent.
X INTRODUCTION
The relationship between a principal and an agent is very important because at
times, a person needs help and assistance from another person to act on his
behalf or become his proxy to perform certain acts. For example, where a person
intends to sell his land, he may need the service of a real estate agent to sell the
land on behalf of him. The owner will then authorise the real estate agent to deal
with the land. This is where the agency relationship comes into existence. In
Malaysia, the law of agency is governed by Part X of the Contracts Act 1950.
Section 135 of the Act defines an „agent‰ as „a person employed to do any act for
another or to represent another in dealings with third persons‰, and a „principal‰
as „the person for whom such act is done, or who is so represented.‰ From the
definition above, it can be said that the contract of agency is divided into two:
(a) A contract between the principal and agent, where the agent attains the
authority to act for and on behalf of the principal; and
TOPIC 8 LAW OF AGENCY (PART 1) W 123
(b) A contract between the principal and third party through an agent.
An agent can therefore make contracts with third parties that are binding on the
principal.
8.1 CAPACITY
Section 137 of the Contracts Act 1950 provides a requirement for a person to
become an agent. According to the provision,
„any person may become an agent, but no person who is not of the age of
majority and of sound mind can become an agent, so as to be responsible to his
principal.‰
For example, A hires B, who is 16 years old, to buy goods from C on his behalf. C
supplies the goods to A through B, but B sells the goods for his benefit. A cannot
deny his responsibility to C on the ground that B is a minor. A is still liable to C
for the payment of the goods and A cannot claim damages from B.
8.2 FORMATION OF AGENCY

There are several ways for a contract of agency to exist (Refer to Figure 8.1), as
follows:
(a) By express appointment
(b) By implied appointment
(c) By ratification
(d) By necessity
(e) By estoppel or Âholding outÊ

124 X TOPIC 8 LAW OF AGENCY (PART 1)
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Figure 8.1: Elements for formation of agency
8.2.1 Agency by Express Appointment

An agency by express appointment is created through verbal or written
authorisation by the principal to the agent. The principal gives express authority
to the agent as stated in the first part of Section 140 of the Contracts Act, 1950.
According to Section 140, “an authority is said to be express when it is given by
words spoken or written.”
8.2.2 Agency by Implied Appointment

The second part of Section 140 of the Contracts Act 1950 provides for implied
appointment of an agent. The appointment is implied when the authority can
only be drawn from the circumstances of the case, which means things that were
spoken or written, or act done by the parties in the ordinary course of dealing.

For example, A stays in Shah Alam and has a shop in Kuala Lumpur. Most of the
time, B, who manages the shop, orders and pays for goods from Y, using AÊs
name. Here it is clear that B has an implied authority from A, as an agent to deal
with Y in purchasing goods for the shop.
There are, however, situations where the authority given under the express
appointment by the principal does not specify the extent of the agentÊs authority.
In such case, an agent who has been authorised to do certain acts, will have the
authority to do other acts, which are connected to the authorised act. This
principle is laid down in Section 141(1) of the Act that says,
„an agent having an authority to do an act has authority to do every lawful thing
which is necessary in order to do the act.‰
Also provided in Section 141(2) of the Act,
„an agent having an authority to carry on a business has authority to do every

lawful thing necessary for the purpose, or usually done in the course of
conducting such business.‰
For instance, M appointed (either verbally or written) N, who lives in Kota

Bharu, as an agent to market his product in Kota Bharu. In his appointment, it
did not specify the extent of authority in which N can act. Therefore, as a
marketing agent, N has the authority to deal with the advertisement, packaging,
distribution and transportation of the product as well as other matters that are
connected with his appointment.
In Summers v. Solomon (1897) AC 22, a real estate agent was instructed by a

hotel owner to find a buyer for the hotel. The agent did as instructed and
received a deposit from a prospective buyer. The owner then brought an
action to cancel the agentÊs act.
The Court held that: Even though the agent was not expressly authorised to
receive deposits from prospective buyer, he was presumed to have acted
under the ambit of implied authority of an agent.
Implied appointment of agency also exists between partners in a partnership

business. Under common law, an agency relationship exists between husband
and wife. It is presumed that a wife has the authority to buy necessaries for their
living by pledging her husbandÊs credit. The assumption is rebuttable if the
husband can prove that the wife was given sufficient allowance for buying
goods, or the wife was sufficiently provided for with the goods, or the order was
unreasonable, or he expressly forbade his wife to pledge his credit or he

expressly warned the trader not to supply his wife with the goods.
8.2.3 Agency by Ratification

Agency by ratification can arise if one of the situations below exists:
(a) when an agent exceeded his authority; or

(b) when a person is not an agent, but acted as if he has the authority to act as
an agent.
In the event of the above, Section 149 of the Contracts Act 1950 provides that,
„where acts are done by one person on behalf of another but without his
knowledge or authority, he may elect to ratify or to disown the acts.‰
If the principal accepts the contract, such acceptance is known as ratification.

Ratification renders the principal liable to the contract, as if the agent has been
authorised to do such act.
Ratification can be done expressly or impliedly as provided in Section 150 of the

Contracts Act 1950. For example, A, without authority, buys goods for B.
Afterwards B sells them to C on his own account. BÊs conduct implies a
ratification of the purchase made for him by A.
In Muthuchellapa Chettiar v. Indian Overseas Bank Ltd [1952] MLJ 25, part
payment on an overdraft by the principal (which had been arranged by the
agent without the principalÊs authority) was an implied ratification of the
loan.
Ratification operates retrospectively. Thus, the ratified contract is considered

valid or effective from the date it was made by the agent and not from the date of
ratification. For example, on 3rd January, P appointed E as an agent to purchase
goods at the price of not exceeding RM200,000. On 5th June, E agreed to purchase
goods from Z at the price of RM220,000. In this case, E was not authorised to
purchase the goods exceeding the amount given by the principal. Therefore, P
had the option to either ratify or reject EÊs contract with Z. If P accepted EÊs act on
7th June, E would therefore become an agent by ratification. Consequently, the
contract entered by E and Z was valid on 5th June and not on 7th June.

However, such ratification by the principal can only be done under the following
conditions:-
(a) The unauthorised act must be recognised by the law and not a void
contract.
(b) At the time the contract was made, the agent must have acted as an agent
for the principal. Therefore the agent must disclose that the contract was
entered into on behalf of his principal.
In the case of Keighley Maxted & Co. v. Durant [1901] AC 240,

the appellants authorised the agent to buy wheat at a certain price. The
agent exceeded his authority and bought at a higher price, in his own
name. The principal, however, agreed to take the wheat at the higher
price but failed to take delivery.
It was held that: The principal (Keighley) was not liable and could not
ratify the contract because at the time of the contract, the agent has acted
in his own capacity.
(c) At the time the contract was made, the agent must have actual principal in
existence.
(d) At the time of ratification, the principal must have full knowledge of the
material facts to be ratified, unless there is evidence to show that he does
not care of the facts that he intends to ratify. According to Section 151 of the
Contracts Act 1950, „no valid ratification can be made by a person whose
knowledge of the facts of the case is materially defective.‰
In Kelner v. Baxter (1866) LR 2 CP 174, a contract to buy a hotel on

behalf of a company by an agent could not be ratified by the company
because it did not exist at that time.
(e) The principal must ratify the whole contract. He cannot ratify only part
which is advantageous to him and reject the rest. Section 152 of the
Contracts Act 1950 provides „a person ratifying any unauthorised act done
on his behalf ratifies the whole of the transaction of which the act formed a
part.‰

(f) Ratification must not affect, injure or terminate a third partyÊs rights.
Section 153 of the Contracts Act 1950 provides that „an act done by one
person on behalf of another......which.....would have the effect of subjecting
a third person to damages, or of terminating any right or interest of a third
person, cannot, by ratification, be made to have that effect.‰
(g) Ratification must be exercised within a reasonable time.
In Grover & Grover v. Mathews [1910] 2 KB 401, a fire insurance

policy ratified after the event insured against had happened was
held to be ineffective.
(h) At the time the contract was made and at the time of ratification, the
principal must have contractual capacity.
8.2.4 Agency by Necessity

Agency by necessity arises when there is an emergency situation and it becomes
necessary for the agent to act to preserve the principalÊs property. Section 142 of
the Contracts Act 1950 provides that,
„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.‰
For an agency by necessity to exist, the following conditions must be fulfilled.

(a) It is impossible for the agent to get the principalÊs instructions.
In Springer v. Great Western Railway Company [1921] 1 KB 257,
The contract was to carry the plaintiffÊs tomatoes from Jersey to

Covent Garden market. However, the ship arrived late at
Weymouth due to bad weather and some of the tomatoes were
found to be bad. Without communicating with the plaintiff, the
defendants decided to sell the tomatoes locally because it was not
possible for them to arrive in Covent Garden market to deliver the
tomatoes in a saleable condition. The plaintiff then claimed for
damages in conversion based on the market price of tomatoes in
Covent Garden.
The Court held that: The plaintiff was entitled to damages because
the defendants were not agents of necessity. They have failed to
communicate with the plaintiff.
(b) The agent acted to prevent the principal from incurring loss or damages.
If the goods are not perishable goods like clothes or furniture, it will not
give rise to emergency situation that requires disposal of them. Therefore,
an agent who acted in such case will be liable for the loss suffered by the
principal.
(c) The agent acted in good faith for the interest of the principal.
The agent may be considered has acted in good faith to protect the interest
of the principal if he collects the payment from the third party in order to
prevent his principal from suffering losses, if the third party does not pay
certain amount after using services provided by the principal.
8.2.5 Agency by Estoppel or Holding Out

Under Section 190 of the Contracts Act 1950,
„when an agent has, without authority, done acts or incurred obligations to third
persons on behalf of his principal, the principal is bound by those acts or
obligations if he has by his words or conduct induced such third persons to
believe that those acts and obligations were within the scope of the agentÊs
authority.‰

For instance, E tells X in the presence of P that he is PÊs agent and is authorised to
make contract on behalf of P. In actual fact, E is not PÊs agent. P does not deny EÊs
statement. When X sold goods to E, X may claim for the payment of the goods
from P, and P was estopped from denying the existence of EÊs authority.
8.3 AUTHORITY OF AN AGENT

It is important to know the extent of an agentÊs authority because any act done by
the agent within his authority will bind the principal. The agentÊs authority is
classified into:
(a) Actual authority and
(b) Apparent authority.
8.3.1 Actual Authority

(a) Express actual authority
Express actual authority is expressly given by the principal (orally or in
writing) to the agent. For example, T appoints S as his agent to purchase
goods not exceeding RM10,000. In such case, SÊs actual authority is to
purchase goods on behalf of T, not exceeding RM10,000.
(b) Implied actual or usual authority

Implied actual authority is the proper or necessary authority given to the
agent to execute the express authority. For example, T appoints S as his
agent to sell TÊs car. S has implied authority to allow the purchaser to test
drive the car.

In Watteau v. Fenwick [1893] 1 QB 346,
The defendant appointed a manager to run a public house. A licence was

taken out in the managerÊs name. The defendant forbade the manager to buy
cigars on credit, which was disregarded by the manager. The plaintiff then
claimed for the price of the cigars from the defendant.
The Court held that: The defendant (as the principal) was liable to pay
because a manager of a public house usually had the authority to make such
purchases. Therefore, the plaintiff could rely on the usual authority of the
manager if he has no knowledge of the restrictions imposed by the principal.
In Panorama Development (Guilford) Ltd. v. Fidelis Furnishing Fabrics Ltd

[1971] 3 AllER 16,
The Court held that: The company (defendant) was liable for the contract of
hiring of motor vehicles made by the company secretary. Although the
company secretary exceeded his actual authority in hiring the motor vehicles
from the plaintiffs, the act was within the usual authority of a company
secretary, and it was considered as part of the company administration.
8.3.2 Apparent or Ostensible Authority

Apparent authority arises where a principal (by words or conduct) makes the
third party believe that the agent has the authority to make contracts for the
principal. According to Section 190 of the Contracts Act 1950
„when an agent has, without authority, done acts or incurred obligations to third
persons on behalf of his principal, the principal is bound by those acts or
obligations if he has by his words or conduct induced such third persons to
believe that those acts and obligations were within the scope of the agentÊs
authority.‰
The principal is therefore precluded from denying the authority of the agent
because the element of estoppel applies. It is due to the representation made by
the principal to the third party that leads the third party to believe that the agent
has such authority.

In the case of Graphic Lines Pte Ltd v. Chai Chee Mein & Ors (1987) Nov.
ButterwothsÊ Digest,
The Court held that: The assistant manager had an apparent authority because
the general manager had represented to the plaintiffs that advertisements
should be done through the assistant manager.
SELF-CHECK 8.1
(a) Who is an agent?

(b) Can a minor become an agent ?
(c) What are the ways of formation of agency contract?
(d) Must the appointment of an agent be done expressly?
(e) Under what circumstance can the principal ratify his agentÊs act?
(f) Does ratification of agency contract operate retrospectively?
(g) What are the conditions for an agency by necessity to exist?
(h) What is meant by agency by estoppel?
(i) What is the importance of an authority to an agent?
(j) What is the difference between usual authority and ostensible
authority?

ACTIVITY 8.1 – 8.3
Discuss the following questions.

(a) Zila was appointed by Jaya to supervise the purchase of 1000
plastic bottles produced by Syarikat Kalis Berhad (SKB). While
carrying out such duty, Zila decided to place an order of 1050
plastic bottles produced by SKB in her own name. Discuss the
effect of ZilaÊs act according to the law of agency.
(b) Richard has just sold his share in one company and decided to
buy a new car for his wife. On 15 June 2007, Richard appointed
Gary as his agent to buy a car at the price not exceeding
RM70,000. The next day, Gary went to see Tan Chong, a car
dealer and booked a car at the price of RM75,000 and paid the
deposit of RM7,500. Gary told Tan Chong that the car was meant
for RichardÊs personal use. One month after the booking date,
Tan Chong sent the car to Richard and claimed for the balance
purchase price of the car. Richard told Tan Chong that he has
never authorised Gary to purchase the car at that price and
refused to accept the car. Tan Chong knew about the limitation
of GaryÊs authority. Decide whether Tan Chong could claim for
the price of the car from Richard.
(c) Charlie has appointed Yuppie as his agent to carry out the
following:
i. To deliver 200 bags of Taj Mahal rice at the price of
RM4,000 to Kedai Runcit Tampan (KRT) in Bukit Tinggi on
10th February 2004;
ii. To obtain the supply of 100 kilograms salted fish from
Tamban Enterprise (TE) after delivery of the rice bags to
KRT.
On the 10th of February, upon reaching KRT, Yuppie discovered

that the shop was closed beginning 9th February and would be
opened on 15th February 2004. Without contacting Charlie for
further instruction, Yuppie went to Pasar Mini Sayugia (PMS),
which agreed to buy all the rice bags at the price of RM3,000.
Later, Yuppie went to TE and bought 150 kilograms of salted
fish on behalf of Charlie.
Advise Charlie on the legal claims that he can take against

Yuppie.

• Agency arises from an agreement between the principal and the agent.
• In the agreement the principal authorises the agent to do things on behalf of
the principal.
• The formation of an agency contract can be done through an express or
implied appointment, ratification, necessity or estoppel.
• Agency by express appointment can be done verbally or in writing.
• Agency by ratification arises when the principal accepts the contract made by
the agent who exceeds his authority or acts without authority.
• A ratified contract is valid and effective from the date the contract was made.
• Agency by necessity arises when there is an emergency situation which
would require the agent to act promptly.
• Implied actual authority is the proper or necessary authority given to the
agent to execute the express authority.
• Apparent authority arises where a principal makes the third party believes
that the agent has the authority to make contracts for the principal.
Principal Implied appointment

Agent Ratification
Actual authority Necessity
Apparent authority Estoppel
Express appointment Holding out
Text Books:

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

Topic X Law of
9 Agency
(Part II)
LEARNING OUTCOMES
1. Identify duties of agents and principals;
2. Describe the rights of agents and principals;
3. Discuss the effect of agency contract; and
4. Explain the rules of termination of agency contract.
X INTRODUCTION
An agency relationship arises out of an agreement between the principal and the
agent. The agreement confers the rights and duties to the principal and agent,
whether express or implied. However, if the contract does not specify the rights
and duties of the parties, the provisions in Sections 164 to 178 of the Contracts
Act, 1950 will be applicable. The provisions in Section 164 to 174 govern the
duties of an agent to his principal and the provisions in Section 175 to 178 deals
with the principal's duties to his agent.
9.1 DUTIES OF AGENT TO PRINCIPAL

As far as the duty of an agent to his principal is concerned, the agent is obliged to
do the following for the principal:
1. Obey the principal's instructions

TOPIC 9 LAW OF AGENCY (PART II) W 137
"an agent is bound to conduct the business of his principal according to the
directions given by the principal....Where the agent acts otherwise, if any
loss sustained, he must make it good to his principal, and if any profit
accrues, he must account for it."
The provision provides that an agent who fails to carry out his principal's
instructions will result in breach of contract and consequently, the agent
will be liable for any loss sustained by the principal. For example, the
principal instructed his agent to purchase certain goods at certain price.
However, the agent purchased more than the authorised price and as a
result; the agent was to be personally liable for the payment of the price of
the goods. If the principal's order is clearly illegal, the agent has no
obligation to obey the order.
In the case of Turpin v. Bilton (1843) 5 Man & G 455, an agent failed to
insure his principal's ship although he had been ordered to do so.
When the ships lost, the court decided that the agent was liable for the
losses.
2. Act according to the customs prevail if there is no instruction from the

principal
"an agent is bound to conduct the business of his principal according to the
directions given by the principal, or, in the absence of any such directions,
according to the custom which prevails in doing business of the same kind
at the place where the agent conducts the business."
Therefore, the provision requires the agent to act according to the customs
which prevail in doing business of the same kind if there is no clear
instruction from the principal. Otherwise he has to make good any loss
sustained by the principal.

138 X TOPIC 9 LAW OF AGENCY (PART II)
Illustration (a)
A, an agent engaged in carrying on for B a business, in which it is the

custom to invest from time to time, at interest, the moneys which may
be in hand, omits to make the investment. A must make good to B the
interest usually obtained by such investments.
Illustration (b)
B, a broker, in whose business it is not the custom to sell on credit, sells

goods of A on credit to C, whose credit at the time was very high. C,
before payment, becomes insolvent. B must make good the loss to A.
3. Exercise care and diligence in carrying out his work and to use skill as he
possesses
Section 165 of the Contracts Act 1950 provides that
"an agent is bound to conduct the business of the agency with as much skill
as is generally possessed by persons engaged in similar business, unless the
principal has notice of his want of skill. The agent is always bound to act
with reasonable diligence, and to use such skill as he possesses; and to
make compensation to his principal in respect of the direct consequences of
his own neglect, want of skill, or misconduct, but not in respect of loss or
damage which are indirectly or remotely caused by such neglect, want of
skill or misconduct."
The following case and illustrations explain the provision above. It means if
an agent failed to carry out his duty diligently, skilfully and with due care,
the agent must make good any loss sustained by the principal as result of
his act.

In the case of Keppel v Wheeler [1927] 1 KB 577, the plaintiff employed the
defendant to sell his house. The plaintiff received an offer and accepted it
„subject to contract‰. A few days later, X made a higher offer for the property
but the defendant did not communicate this offer to the plaintiff. As a result,
the first offer was signed.
The court held that: The defendant was liable to the plaintiff for the difference
between the two offers.
Illustration (a)
A, a merchant in Kuala Lumpur, has an agent, B, in London, to whom a sum of

money is paid on AÊs account, with orders to remit. B retains the money for a
considerable time. A, in consequence of not receiving the money, becomes
insolvent. B is liable for the money and interest from the day on which it ought
to have been paid, according to the usual rate, and for any further direct loss
(for e.g., by variation of rate of exchange), but not further.
Illustration (b)
A, an agent for the sale of goods, having authority to sell on credit, sells to B
on credit, without making proper and usual enquiries as to the solvency of B.
B, at the time of the sale, is insolvent. A must make compensation to his
principal in respect of any loss sustained.
Illustration (c)
A, an insurance-broker employed by B to effect an insurance on a ship, omits

to see that the usual clauses are inserted in the policy. The ship is afterwards
lost. In consequence of the omission of the clauses, nothing can be recovered
from the underwriters. A is bound to make good the loss to B.

Illustration (d)
A, a merchant in England, directs B, his agent at Kelang, who accepts the

agency, to send him 100 bales of cotton by a certain ship. B, having it in his
power to send the cotton, omits to do so. The ship arrives safely in England.
Soon after her arrival, the price of cotton rises. B is bound to make good to A
the profit which he might have made by the 100 bales of cotton at the time the
ship arrived, but not any profit he might have made by the subsequent rise.
4. Render proper accounts when required
„an agent is bound to render proper accounts to his principal on demand.‰
This means the agentÊs duty is to account for all monies and the property
handled by him as agent for the principal and to produce such accounts
when demanded by the principal.
5. Pay the principal all sums received on his behalf
Section 171 of the Contracts Act 1950 provides that

„the agent is bound to pay to his principal all sums received on his account
(subject to the deductions in Section 170).‰
According to Section 170,
„an agent may retain, out of any sums received on account of the principal
in the business of the agency, all moneys due to himself in respect of
advances made or expenses properly incurred by him in conducting such
business, and also such remuneration as may be payable to him for acting
as agent.‰
Section 174 of the Contracts Act 1950 also gives the agent the right to retain
his principalÊs property in his possession until his remuneration is paid.
According to Section 174,
„in the absence of any contract to the contrary, an agent is entitled to retain
goods, papers and other properties, whether movable or immovable, of the
principal received by him, until the amount due to himself for commission,
disbursements and services in respect of the same has been paid or
accounted for to him.‰

6. Communicate with the principal
It is the duty of an agent to communicate with his principal. As provided in

Section 167 of the Contracts Act 1950,
„it is the duty of an agent, in cases of difficulty, to use all reasonable

diligence in communicating with his principal, and in seeking to obtain his
instructions.‰
7. Avoid conflict of interest with own duty
It is the agentÊs duty not to let his personal interest conflict with his duty.
Obviously, an agent must not become a party in a transaction and he must
act solely for the benefit of the principal. For instance, A directs B to sell AÊs
estate, but B buys the estate for himself in the name of C. Thus, if the
principal discovers the truth, he has the right to repudiate the transaction.
For the example above, A 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 the sale has been disadvantageous to the
principal.
„if an agent deals on his own account in the business of the agency, without
first obtaining the consent of his principal and acquainting him with all
material circumstances which have come to his own knowledge on the
subject, the principal may repudiate the transaction, if the case shows either
that any material fact has been dishonestly concealed from him by the
agent, or that the dealings of the agent have been disadvantageous to him.‰
Consequently, the principal has the right to claim any benefit gained by the
agent from the transaction. As laid down in Section 169 of the Contracts Act
1950,
„if an agent, without the knowledge of his principal, deals in the business
of the agency on his own account instead of on account of his principal, the
principal is entitled to claim from the agent any benefit which may have
resulted to him from the transaction.‰
For instance, A directs B to buy certain house for him. B tells A it cannot be
brought, and buys the house for himself. On discovering this, A may
compel B to sell it to him at the price he gave for it.

8. Not to make any secret profit out of the performance of his duty.
An agent is also under a duty not to make secret profit out of the
performance of his duty. Secret profit may include payment of a secret
commission or any financial advantage received by the agent, above the
commission or remuneration agreed by the parties. An agent can only keep
the profit if the principal consents to it. Otherwise the principal may take
the following actions:
(a) Repudiate the contract if it is disadvantages to him (Section 168 of the

Contracts Act 1950).
(b) Recover the amount of the secret commission from the agent (Section
169 of the Contracts Act 1950).
(c) Refuse to pay the agent his commission or other remuneration as

illustrated in the following case:
In the case of Andrews v Ramsay & Co [1903] 2 KB 635, the plaintiff

instructed the defendant to sell property and agreed to pay him 50
pounds as commission. The defendant received 100 pounds from a
purchaser as deposits for the property. The defendant paid 50 pounds
to the plaintiff and kept the other 50 pounds in payment of his
commission with the plaintiffÊs consent. Later, the plaintiff discovered
that the defendant received 20 pounds as commission from the
purchaser. The plaintiff sued to recover the 20 pounds and also the 50
pounds he had paid the defendant. It was held that he could recover
both sums.
(d) Dismiss the agent for breach of duty.
(e) Sue the agent and third party giving the secret commission, for
damages for any loss he may have sustained through entering into the
contract.

In Mahesan v. Malaysia Govt. Officers Co-operative Housing Society

Ltd. [1978] 1 MLJ 149, the respondent society bought land at a price of
$944,000 from the vendor who had paid earlier $456,000 for it. The
appellant knew of this fact but failed to inform the society. After the sale
was completed, the society discovered the fact that the appellant had
received $122,000 as a bribe or secret commission from the vendor for
the sale of the said land.
The Privy Council held that: The Housing Society could recover either
the bribe or the amount of the actual loss suffered by it as a result of
entering into the contract.
In the case of Boardman v. Phipps [1966] 3 All ER 721, Lord Denning

said: „Once it is found that the agent has used his principalÊs property
or his position so as to make money for himself, it matters not that the
principal lost no profit or suffered no damage⁄.the reason is simply
because it is money which the agent ought not to be allowed to keep.
He gained unjust benefit by the use of his principalÊs property or his
position and must account for it."
9. Not to disclose confidential information or documents entrusted to him by

his principal
As an agent for the principal, he is usually entrusted with the principal's

confidential information or documents. Thus, an agent must not disclose or
reveal this information to other persons.

In the case of L.S Harris Trustee Ltd v. Power Packing Services (Hermit
Road) Ltd (1970) 2 Lloyd's Rep 65, the court held that the agent's action
revealing the information about the defendant's fire insurance policy
had given right to the defendant to terminate the contract and sued for
damages.
10. Not to delegate his authority
An agent must not delegate his authority to another person because an

agency relationship is personal in nature and involves trust and confidence,
placed by the principal on his agent. This principle is in line with the
maxim "delegatus non potest delegare" which means "a delegate cannot
delegate." It is also provided in Section 143 of the Contracts Act 1950 thatÊs
"an agent cannot lawfully employ another to perform acts which he has
expressly or impliedly undertaken to perform personally, unless by the
ordinary custom of trade a sub-agent may, or, from the nature of the
agency, a sub-agent must, be employed."
However, to this rule there are exceptions. Thus, an agent may delegate his
authority or appoint a sub agent under the following circumstances:
(a) Where the principal approves of the delegation of authority.

(b) Where it is presumed from the conduct of the parties that the agent
shall have power to delegate his authority.
(c) Where the customs of the trade or business permits delegation.
(d) Where the nature of the agency is such that delegation of the authority
to another person is necessary to complete the business.
(e) In cases of necessity or unforeseen emergency (for instance, due to
sickness of agent).
(f) Where the act to be done is purely ministerial or clerical and does not
involve the exercise of discretion.
9.2 DUTIES OF PRINCIPAL TO AGENT

As far as the duty of a principal to his agent is concerned, the principal is obliged
to do the followings in carrying out his duties under the agency contract:

1. Pay the agent any commission or other remuneration unless the agency
relationship is gratuitous.
The amount of commission to be payable to an agent depends on the terms
of the contract of agency. Generally, the right to receive commission or
other remuneration arises when the agent has done all that he had agreed
to do. Where no amount is agreed, the agent is entitled to reasonable
remuneration.
However, an agent loses his right to remuneration if there is misconduct

(wrongful or improper conduct) in the business of the agency. Section 173
of the Contracts Act 1950 provides that,
"an agent who is guilty of misconduct in the business of the agency is not
entitled to any remuneration in respect of that part of the business which he
has misconducted."
For example, A employs B to recover $100,000 from C and to invest in

good securities. B recovers the $100,000 and invests $90,000 in good
securities and the other $10,000 in securities which he ought to have
known to be bad. As a result, A loses $2000. B is entitled to the
remuneration for recovering the $100,000 and for investing the $90,000.
But he is not entitled to any remuneration for investing the $10,000 and
he must make good the $2000 loss to A.
Another example, A employs B to recover $1,000 from C. Through B's

misconduct the money is not recovered. B is entitled to no remuneration
for his services, and must make good the loss.
2. Not to wilfully prevent or hinder the agent from earning his commission
A principal cannot employ another agent if an agent has already been

appointed to carry out certain duties. Particularly, if the appointed agent is
already in the midst of negotiations and the act of appointing another agent
is to deprive the original agent from earning his commission.
3. Indemnify the agent for acts done in the exercise of his duties
„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.‰ It means the principal must indemnify the
agent when he incurred loss or liability in exercising his authority.
For example:
Illustration (a)
B, at Kelang, under instructions from A, in Taiping, contracts with C to

deliver certain goods to him. A does not send the goods to B, and C
sues B for breach of contract. B informs A of the suit, and A authorises
him to defend the suit. B defends the suit, and is compelled to pay
damages and costs, and incurs expenses. A is liable to B for such
damages, costs and expenses.
Illustration (b)
B, a broker at Taiping, by the orders of A, a merchant there, contracts

with C for the purchase of 10 casks of oil for A. Afterwards A refuses to
receive the oil, and C sues B. B informs A, who repudiates the contract
altogether. B defends, but unsuccessful, and has to pay damages and
costs, and incurs expenses. A is liable to B for such damages, costs and
expenses.
Subsequently, Section 176 of the Contracts Act 1950 provides that,
„where one person employs another to do an act, and the agent does the act
in good faith, the employer is liable to indemnify the agent against the
consequences of that act, though it cause an injury to the rights of third
person.‰
It means the agent has the right to be indemnified by his principal for any
expenses incurred and consequences of any act, while the agent is acting in
good faith in the execution of his authority, even if it causes injury to third
person.

For example:
Illustration (a)
A, a decree-holder and entitled to execution of BÊs goods, requires the

officer of the court to seize certain goods, representing them to be the
goods of B. The officer seizes the goods, and is sued by C, the true owner
of the goods. A is liable to indemnify the officer for the sum which he is
compelled to pay to C, in consequence of obeying AÊs directions.
Illustration (b)
B, at the request of A, sells goods in the possession of A, but which A had

no right to dispose of. B does not know this, and hands over the proceeds
of the sale to A. Afterwards C, the true owner of the goods, sues B and
recovers the value of the goods and costs. A is liable to indemnify B for
what he has been compelled to pay to C and for BÊs own expenses.
However, if the agent is employed to do a criminal act, the principal is not

bound to indemnify the agent against the consequences of the act. This is
provided in Section 177 of the Contracts Act 1950,
„where one person employs another to do an act which is criminal, the

employer is not liable to the agent, either upon an express or an implied
promise, to indemnify him against the consequences of that act.‰
For example:
Illustration (b)
B, the proprietor of a newspaper, publishes, at AÊs request, a libel upon

C in the paper, and A agrees to indemnify B against the consequences of
the publication, and all costs and damages of any action in respect
thereof. B is sued by C and has to pay damages, and also incurs
expenses. A is not liable to B upon the indemnity.
Consequently, if the agent suffers injury during the course of his duty due
to his principalÊs neglect or want of skill, Section 178 of the Contracts Act
1950 provides that,

„the principal must make compensation to his agent in respect of injury

caused to the agent by the principalÊs neglect or want of skill.‰
For example, A employs B as a bricklayer in building a house, and puts up

the scaffolding himself. The scaffolding is unskilfully put up, and B is in
consequence hurt. A must make compensation to B.
An agent loses his right to an indemnity if he acts beyond his authority or

negligently performs his duty. This can be seen in following case of:
Davison v. Fernandes (1889) 6 TLR 73. The defendant in this case asked
the plaintiff to quote the price of some stock ex dividend, but the
plaintiff quoted the price cum dividend. Due to plaintiffÊs negligence,
he failed to inform the defendant accordingly. The defendant then
authorised the plaintiff to sell the stock. The plaintiff sold and had to
pay the dividend to the purchaser (under the rules of the London Stock
Exchange).
The Court held that: The plaintiff was not entitled to be indemnified by
the defendant.
In case of Solloway and Anor. v. McLaughlin [1938] MLJ 23, the Privy
Council held that agents who engaged in a fraudulent scheme to
defraud their principals, will forfeit their right to an indemnity in
respect of transactions which form part of the fraud.

SELF-CHECK 9.1
(a) What are the agentÊs duties towards his principal under the
law?
(b) What is the liability of an agent who breaches the duty?
(c) What actions can be taken by a principal who discovers his
agent making a secret profit?
(d) Can an agent delegate his authority to another person? Why?
(e) Under what circumstance can an agent appoint a sub-agent?
Give at least one example.
(f) What are the legal duties of a principal to his agent?
(g) Under what situations will an agent lose his right to
remuneration?
(h) What are the conditions under which a principal is not bound
to indemnify his agent?

ACTIVITY 9.1
Discuss the following questions:
(a) Hasnan employed Lenny, an auctioneer, to sell certain property for
him and agreed to pay Lenny a commission on the sale and other
miscellaneous expenses including printing and advertising costs.
From the contract, Lenny received discounts from the printers and
advertisers but charge Hasnan with the full amount of the contract
price and kept the discounts for himself. Decide whether Lenny is
bound to account Hasnan for the discounts that he received.
(b) Mr Kim employed a firm of estate agents to sell his bungalow for
him. Goh, a member of the firm, represented to Mrs Irene that the
property was of considerable value that any financier would easily
provide financial assistance to the purchaser of the bungalow. In
actual fact, this was quite untrue because the bungalow had been
underpinned several times to prevent it from falling down. Mr Kim
knew that the bungalow was in poor condition but he did not
authorise Goh to make the representation. Goh himself had no
knowledge of the underpinning. Mrs Irene bought the bungalow
on the faith of the representation and on discovering the
underpinning, sued Mr Kim for damages for fraud. Advise Mrs
Irene whether her action would succeed.
(c) Ramoo and Santhi employed Ryder and Co., a firm of merchants to
buy goods for them. Ryder & Co. bought the goods in their own
names from Mr Kye. Mr Kye did not inquire whether they were
acting as agents or principals, and supplied the goods on credit.
Ramoo and Santhi paid Ryder & Co. for the goods in the ordinary
course of business. A fortnight later, Ryder & Co. stopped payment
and did not settle the payment to Mr Kye. Upon discovering the
agency, Mr Kye sued Ramoo and Santhi for the price. Could Mr
Kye succeed?

9.3 EFFECTS OF CONTRACTS MADE BY

AGENTS
The effect of contracts made by agents will be discussed in relation to the
categories of principal. The kinds of principals include:
• A named principal,
• A disclosed principal but not the name; and
• An undisclosed principal.
9.3.1 A Named Principal

A named principal is a principal whose name has been revealed to the third
party by the agent. The third party knows that the agent is contracting as an
agent and knows the principal for whom the agent is acting. Thus, the agent is
not liable for the contract and the contract is binding on the principal. However,
there are exceptions under Section 183 of the Contracts Act 1950, where an agent
would be personally liable for the contract as follows:
(a) Where the agent agrees to accept personal liability.
(b) Where the agent executes a deed in his own name.
(c) Where the agent signs a negotiable instrument in his own name.
(d) Where the agent exceeds his authority and the principal does not ratify the
contract.
9.3.2 An Undisclosed Principal

An undisclosed principal is the principal whose identity and existence is not
disclosed by the agent to the third party at the time of contract. The third party
who enters into a contract with the agent of undisclosed principal is bound by it
if he discovers that the contract is actually made on behalf of undisclosed
principal. If the third party does not know that a person he deals with is acting as
an agent, he has the right to sue the agent or the principal or both. Section 186 of
the Contracts Act 1950 says,
"in cases where an agent is personally liable, a person dealing with him may hold
either him or his principal, or both of them, liable."

Illustration
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.
The agent may be held personally liable on the contract because the third party
does not know that the agent is acting for someone.
In the case of Pernas Trading Sdn Bhd v. Persatuan Peladang Bakti Melaka
[1979] 2 MLJ 124, the respondents ordered chemicals and fertilisers for
themselves (rather than on behalf of the principal), but they denied liability
when the appellants sued for the balance of the price.
The Federal Court held that: Although the respondents were agents for a
principal, they had contracted for themselves. Therefore, they were
personally liable.
According to Section 183(b) of the Contracts Act 1950, if the agent does not
disclose the name of the principal, the agent is presumed to be personally liable.
9.4 TERMINATION OF AGENCY
Termination of agency is dealt with under Sections 154 to 163 of the Contracts
Act 1950. Generally, agency contract may be terminated in the following ways:
(a) Act of the parties
(b) Operation of law
9.4.1 Termination by the Act of the Parties

The termination by the act of the parties may be made in the following ways:
(a) By mutual agreement of both principal and agent
(b) By revocation of authority by the principal
(c) By renunciation of the agency by the agent

„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 unsound mind;
or by the principal being adjudicated or declared a bankrupt or an insolvent.‰
(i) Termination of agency, where agent has an interest in subject matter.
Section 155 of the Contracts Act 1950 states:
„Where the agent has himself an interest in the property which forms the
subject-matter of the agency, the agency cannot, in the absence of an
express contract, be terminated to the prejudice of such interest.‰
For example, A gives authority to B to sell AÊs land, and to pay himself, out
of the proceeds, the debts due to him from A. A cannot revoke this
authority, nor can it be terminated by his unsoundness of mind or death.
(ii) When principal may revoke agent's authority.
„The principal may, save as is otherwise provided by the last preceding

section, revoke the authority given to his agent at any time before the
authority has been exercised so as to bind the principal.‰
(iii) Revocation where authority has been partly exercised.
Section 157 of the Contracts Act 1950 stipulates:
„The principal cannot revoke the authority given to his agent after the
authority has been partly exercised; so far as regards such acts and
obligations as arise from acts already done in the agency.‰
For example, A authorises B to buy 1,000 bales of cotton on account of A,

and to pay for it out of AÊs money remaining in BÊs hands. B buys 1,000
bales of cotton in his own name, so as to make himself personally liable for
the price. A cannot revoke BÊs authority so far as regards payment for the
cotton.
(iv) Compensation for revocation by principal or renunciation by agent.
Section 158 of the Contracts Act 1950 stipulates:

„Where there is an express or implied contract that the agency should be

continued for any period of time, the principal must make compensation to
the agent, or the agent to the principal, as the case may be, for any previous
revocation or renunciation of the agency without sufficient cause.‰
(v) Notice of revocation or renunciation.
„Reasonable notice must be given of such revocation or renunciation;

otherwise the damage thereby resulting to the principal or the agent, as the
case may be, must be made good to the one by the other.‰
(vi) Revocation and renunciation may be expressed or implied.
„Revocation and renunciation may be expressed or may be implied in the

conduct of the principal or agent, respectively.‰
For example, A empowers B to let AÊs house. Afterwards A lets it himself.
This is an implied revocation of BÊs authority.
9.4.2 Termination by Operation of Law

Termination by operation of law is also provided in Section 154 of the Contracts
Act 1950,
„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 unsound mind;
or by the principal being adjudicated or declared a bankrupt or an insolvent.‰
Thus, termination by operation of law may be made in the following ways:

(a) By the performance of the contract of agency.
(b) By the expiration of the period fixed in the contract of agency.
(c) By the death of the principal or agent.
(d) By the insanity of the principal or agent.
(e) By the principal becoming insolvent or being made a bankrupt.
(f) By the happening of an event which renders the agency unlawful (for
example, in cases of frustration).

SELF-CHECK 9.2
a) What is the effect of contract made by an agent who named his

principal to the third party?
b) Under what circumstance will an agent be personally liable for a
contract?
c) How can an agency contract be terminated?
d) Is there any situation under which a principal cannot revoke the
authority of his agent?
e) Describe the ways of termination of agency by way of operation
of law.
• An agency contract confers rights and duties to the principal and agent.
• An agent is bound to conduct the business of his principal according to the
principalÊs instruction.
• An agent must act according to the customs prevailent in the absence of
instruction from the principal.
• An agent must exercise care and diligence, and use his skill in carrying out
his work.
• An agentÊs duty is to render proper accounts to his principal.
• An agent must communicate with his principal to get further instructions.
• It is an agentÊs duty not to let his personal interest conflict with his own duty.
• An agent must not make any secret profit out of the performance of his duty.
• An agent must not disclose confidential information or documents entrusted
to him by his principal.
• An agent cannot delegate his authority to another person without permission
or approval from the principal.
• A principalÊs duty is to pay the agent his commission or remuneration.

• A principal must not wilfully prevent his agent from earning his commission.
• A principal is bound to indemnify his agent for acts done within his scope of
authority.
• An agent is not liable for contracts done for a named principal.
• An agency contract may be terminated by the act of the parties or by
operation of law.
Duties Termination
Named principal Revocation
Undisclosed principal Renunciation
Mutual agreement Notice
Text Books
• Wu. M.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.).
Cases
• Andrews v Ramsay & Co [1903] 2 KB 635.
• Boardman v. Phipps [1966] 3 All ER 721.
• Davison v. Fernandes (1889) 6 TLR 73.
• Keppel v Wheeler [1927] 1 KB 577.
• L.S Harris Trustee Ltd v. Power Packing Services (Hermit Road) Ltd (1970) 2
Lloyd's Rep 65.
• Mahesan v. Malaysia Govt. Officers Co-operative Housing Society Ltd. [1978]
1 MLJ 149.
• Pernas Trading Sdn Bhd v. Persatuan Peladang Bakti Melaka [1979] 2 MLJ
124.

• Solloway and Anor. v. McLaughlin [1938] MLJ 23.

• Turpin v. Bilton (1843) 5 Man & G 455.

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

TOPIC 10 LAW OF PARTNERSHIP (PART I) W 159
10.1 DEFINITION OF PARTNERSHIP AND ITS

CHARACTERISTICS
It is important to establish a partnership between parties since the formation of it
entails certain obligations and liabilities for the partners. Section 3(1) of the
Partnership Act 1961 defines partnership as "the relation which subsists between
persons carrying on a business in common with a view of profit." Partnership
however does not include clubs, societies, mutual benefit organisations and
building societies (Refers to Figure 10.1).
(a) The relation between parties

In order to form a partnership, there must be a minimum of two persons.
Therefore, there is usually an agreement to be made by the parties which
lay down certain terms and conditions relating to the partnership business,
and duties and responsibilities of the partners involved. This agreement
will be binding upon every partner and enforceable in law.
(b) The agreement is for business purpose

Section 2 of the Partnership Act 1961 defines 'business' as includes every
trade, occupation or profession. Thus, the persons must have an agreement
to have a business in common.
(c) The business is for purpose of gaining profit

This means the partners agree to carry on business for profit. Thus, if a
person is excluded from sharing any profit in a partnership, then he is not a
partner. Similarly, the relationship between persons to do voluntary or
welfare works is not a partnership.

160 X TOPIC 10 LAW OF PARTNERSHIP (PART I)
Figure 10.1: Characteristic of Partnership
Section 3(2) of the Partnership Act 1961 therefore excludes the following list from
the definition of partnership:
• The relation between members of a company or association which is

registered as a company under the Companies Act 1965 or a co-operative
society under any written law relating to co-operative societies; or
• The relation between members of a company or association which is formed

or incorporated by or in pursuance of any other law having effect in Malaysia
or letters patent, Royal Charter or Act of Parliament of the UK.
Existence of partnership: Some considerations

Where a partnership agreement does not exist, Section 4 of the Partnership Act
1961 provides a number of tests in determining the existence of a partnership, as
follows:
Section 4(a) Joint tenancy, tenancy in common, joint property, or part ownership
does not of itself form a partnership.
Section 4(b) The sharing of gross returns does not of itself establish a partnership,
whether the parties who share the returns have or do not have a joint
right or interest in the property from which or from the use of which
the returns are derived.
Section 4(c) Sharing of business profit by a person is prima facie evidence of

partnership. However, the presumption may be rebutted if the
sharing is for some other reasons:
• Payment of a debt out of profits of the business to a creditor by
instalments does not make the creditor a partner in the business.
• Remuneration to a servant or an agent of the business from the
profit of their employer's business.
• Payment of an annuity or a portion of the profits to a widow or
child of a deceased partner in the business.
• Payment of interest which varies with the profits on a loan
advanced for use in the business under a written contract.
• Payment to a seller of the goodwill of a business in the form of a
share of the profits of the business.
Section 4(a)
Partnership does not exist between tenants regardless whether they share or not
the profit gained through the use of the land. In the case of jointly owned
property, it does not of itself form a partnership between the owners.

In Davis v. Davis (1894) 70 LT 265, a father gave his business and three
houses to be shared together by his two sons. Two of the houses were
rented out. The sons used part of the money earned from the rental of the
house to improve the business and shared the other remaining portion
equally.
The Court held that: The business was a partnership between the sons but
the joint ownership of the houses and equal share on the earnings did not
make them partners.
Section4(b)
In Cox v. Coulson (1916) 114 LT 599, the defendant, a manager of a theatre

entered into an agreement with Mill whereby Mill would prepare and pay for
the theatre show while the defendant would prepare and pay for the rent of
the stage and lighting services for the show. It was agreed that the defendant
would receive 60% from the gross returns and Mill would receive the
remaining 40%. The plaintiff suffered injury during the show and he sued the
defendant for liability as a partner of Mill.
The Court decided that: Even though the defendant and Mill shared the gross
returns from the business, it did not make the defendant and Mill as partners.
Both had separate responsibility and liability. The defendant was liable to pay
for the rent of the stage and lighting services from the 60% returns he
received. Mill, on the other hand, would settle the journey expenses, salaries
of the actors and the cost incurred during the show from the 40% returns he
received. This showed that no partnership being formed between the
defendant and Mill. Thus, the defendant was not liable to the plaintiff.
Section 4(c)(i)
Payment of a debt out of profits of the business to a creditor by instalments does
not make the creditor a partner in the business. For instance, A lends B a sum of
RM15,000 and A receives a sum RM1,000 per month from the business as
repayment of the loan. Though the payment of RM1,000 per month to A comes
from the profit of the business, A is not a partner to B in the business.

In Badeley v. Consolidated Bank (1888) 38 ChD 238, X intended to build a

railway transportation and borrowed money from Y to finance the project. As
a security for the loan, X charged his machineries and agreed to pay an
interest of 10% of the loan amount and 10% from the profit of the project to Y.
The Court held that: The advance given by Y to X creates a lender-borrower

relationship. Y is not a partner to X though he received the payment from the
profit of the business.
Section 4(c)(ii)
Remuneration to a servant or an agent of the business from the profit of their
employer's business. Any form of payment to a servant or an agent which comes
from the employerÊs business profit constitute salary or wages. Therefore, a
servant or an agent is not a partner in the employerÊs business and has no
partnership liability.
In Abdul Gaffoor v. Mohamed Kassim & Ors [1931-32] FMSLR 19, the plaintiff
was a despatch clerk in the defendantÊs firm. He was then appointed as a
manager in one of the firmÊs branch office. One of the firmÊs documents stated
that the profit from the firm would be divided into 79.4 parts and would be
shared between the plaintiff, the defendant and others partners. The plaintiff
contended that he was a partner but the defendant argued that the
relationship was a mere employer-employee relationship.
The Court held that: The receipt of salary from the profit did not make the
plaintiff a partner of the firm.
Section 4(c)(iii)
Payment of an annuity or a portion of the profits to a widow or child of a
deceased partner in the business. Some partnership agreements provide a term
on payment of annuity to the dependants of a deceased partner. The annuity
comes from the profit of the partnership. In this situation, although the widow or
the child receive payment from the profit of the partnership, it did not make
them partners in the business.

In Commissioners of Inland Revenue v. LebusÊs Trustees [1964] 1 All ER 475,

A, a partner in a firm bequeathed that his right to profit would be given to his
wife upon his death. However, the partner did not perform the bequest and
thereafter, the Inland Revenue imposed certain tax for the amount which the
widow was supposed to receive.
The Court held that: AÊs widow is not a partner of the firm. Therefore, her
portion of money must not be taxable.
Section 4(c)(iv)
Payment of interest which varies with the profits on a loan advanced for use in
the business under a written contract. A person who gives advance payment by
way of a loan and receives a payment of interest which varies according to the
profit of the business is not a partner in the business.
In the case of Re Young Ex p Jones (1896) 75 LT 278, Y and J entered into an

agreement whereby J advanced £500 to Y and in consideration, J would
receive £1 a week out of the profit gained from YÊs business. J also helped in
the management of the business and was given certain power to manage.
The Court held that: The receipt of the payment from the profit in YÊs business
does not make J a partner although J was authorised to deal with the business.
Section 4(c)(v)
Payment to a seller of the goodwill of a business in the form of a share of the
profits of the business. For example, A, a solicitor agreed to sell his firm to B and
agreed to introduce his clients to B. In consideration, B agreed to give A 10% out
of the profit of the business for the period of three years. In this case, although A
receives payment out of the profit of the business, it does not make him a partner
to B in the business.

In Rawlinson v. Clarke (1860) 15 M&M 292, a doctor sold his business and
introduced his clients to the buyer. In consideration, he received certain
payment and shares from the profit made in the first year of the business.
The Court held that: He was not a partner to the buyer.
10.2 FORMATION OF PARTNERSHIP

In formation of a partnership, the elements of a valid contract including
consideration, competency, free consent, lawful purpose, must be present. Also
the relations between partners concerning rights and duties will usually be
contained in an agreement or defined by the Partnership Act 1961.
10.2.1 Partnership under the Law

Distinct from a company, a partnership firm has no separate legal entity from its
founder under the law. A partnership is the relationship between individuals
who intend to do a business in common together. It is not a legal persona but a
label used by a number of individuals trading under that particular name.
Section 6 of the Partnership Act 1961 allows persons to form a partnership to be
called a firm under the name in which the business is carried on. The name under
which a firm carries on business is the name applicable to the persons who are
partners of the firm. Thus, when an action is brought against the firmÊs name, it is
in fact an action against all the partners. For example, Husain, Akbar and Chua
are partners, carrying on business under the name of HAS Enterprise. Hence, if
any person brings an action against HAS Enterprise, it is an action against
Husain, Akbar and Chua.
10.2.2 Lawful Purpose

A partnership must be formed for a lawful purpose. A partnership is said to be
illegal when it is formed with the intention to carry out business activities against
the law. Under Section 47(2) of the Partnership Act 1961, a partnership is also
considered as illegal if the number of partners exceeds twenty persons.

10.2.3 Capacity
The partners must have the capacity to enter into contract. A partner is
competent to contract if he is an adult, of sound mind and has not lost capacity to
enter into contracts under any laws. In partnership, a minor can become a
partner. However, a minor partner is not liable for all the firmÊs debt and
contractual liabilities. When a minor partner reaches his age of majority, he can
exonerate himself from liability by withdrawing himself from the firm. But if he
remains in the firm, he will be liable with other partners.
In William Jacks & Co. (Malaya) Ltd v. Chan & Yong Trading Co (1964) MLJ
105, Jacks claimed a sum of RM12,734.91 being the payment of the goods sold
to the defendant who were partners in a firm. Yong who was a minor partner
at the time of the purchase of the goods did not defend his case but Chan
denied that the goods were for YongÊs personal use. Therefore, other partners
were not liable for the claim.
The Court held that: Even though the goods were bought for YongÊs personal
use, it did not mean that the firm and other partners were not liable and since
Yong did not take any action to terminate his partnership upon attaining
majority age, he was also liable as a partner.
10.2.4 Partnership Agreement

Partners agreement may be in the form of oral or written agreement. The
partners may have partnership agreements in writing, usually known as Articles
of Partnership which provides for particulars of the firm and the terms of the
partnership. In absence of a partnership agreement, the provisions of the
Partnership Act 1961 will be applicable to the partners. For mutual rights and
duties of partners, they may be varied by the partner's consent as provided under
Section 21 of the Partnership Act 1961.
10.2.5 Registration of Partnership

A partnership must be registered under the Registration of Businesses Act 1956
(in Peninsular Malaysia); Sarawak Cap.64 (Business Names) and Cap.33
(Business, Professions and Trade Licensing)(in Sarawak); Trades Licensing
Ordinance, No. 16, 1948 (in Sabah). Particulars as to the date of operation of
business, name of business, name of partners, registered address of business,
type and nature of the business, shall be submitted to the Registrar of Business

for registration. Any changes to the above particulars is to be reported to the

Registry Department. In the event of a dissolution of partnership or death or
retirement of a partner, a report on the same shall be made to avoid liability to
third party after the occurrence of any of the above.
SELF-CHECK 10.1
(a) What is the meaning of partnership?

(b) How to determine the existence of partnership in absence of a
partnership agreement?
(c) Does joint tenancy and tenancy in common create a partnership
between the tenants?
(d) Does sharing of gross returns in a business between two
persons establish a partnership?
(e) Sharing of business profit by a person is prima facie evidence of
partnership. Is the presumption rebuttable?
(f) Is partnership a legal persona?
(g) What is the effect of a partnership formed for unlawful
purposes?
(h) Can a minor become partner in a partnership business?
(i) What is the importance of a partnership agreement?
(j) Must a partnership be registered? Why?

ACTIVITY 10.1

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

10.3 RELATIONSHIP OF PARTNERS AND

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

A partner has an authority to bind the firm if he carries out the partnership
business within his scope of authority. Section 7 of the Partnership Act 1961
provides that every partner is an agent for the firm and other partners for the
purpose of the business of partnership. This means any act done by a partner in
the course of the partneship business binds the firm and other partners; unless
the partner has no authority or unauthorised to act for the firm; and the third
party knows that the partner has no authority or does not know or believe him to
be a partner.
Therefore, for a partner to bind the firm and other partners, his act must have
been carried out within his scope of authority and in the usual way of the
partnership business. Consequently, outsiders or third parties dealing with the
partner may assume that the partner has the authority to do such acts usually
done by partners in that particular kind of business. This is an implied authority
of a partner as an agent for the firm, as illustrated in the following cases:
In Mercantile Credit Ltd. v. Garrod [1962] 3 All ER 1103, P and G were

partners in a garage business. One of the terms of their partnership agreement
prohibited the partners from buying and selling cars. Without the knowledge
of G, P sold a car to Mercantile Credit for a sum of £700 and the money was
deposited into the firmÊs account. When Mercantile Credit initiated a suit to
claim the money back, the Court held that G was liable to the plaintiff. Even
though P was prohibited by the partnership agreement to engage in buying
and selling cars, the act of P was usually done by those who engaged in a
garage business.

In another case, Chan King Yue v. Lee & Wong [1962] 28 MLJ 379, the plaintiff
lent RM35,000 to her husband who was a partner in a firm. The husband
issued a receipt under the firmÊs name and used the money to pay the firmÊs
debt. The plaintiff took an action to recover her money but other partners
refused to pay on the grounds that the plaintiffÊs husband had no authority to
borrow money.
The Court held that: The act of borrowing money by the plaintiffÊs husband
was important for the firmÊs continuous business. Therefore, the firm was
liable.
Section 7 also provides that the partner who has no authority or unauthorised to
act for the firm will not bind the firm if the third party knows that the partner has
no authority or does not know or believe him to be a partner. For example, A has
been informed about B's limited authority and B was unauthorised to order
goods exceeding RM15,000. A made a contract with B for the supply of electrical
goods worth of RM17,000 to the firm. The firm was not bound by the contract.
According to Section 8 of the Partnership Act 1961, an act or instrument relating

to the business of the firm and done or executed in the firm-name, or in any other
manner showing an intention to bind the firm, by any person thereto authorised,
whether a partner or not, is binding on the firm and all the partners.
In the case of Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223, H gave a loan
to one of the partners in a firm. As a security, a bill of sale has been issued
bearing the signature and seal „by Ng Teng Tuan, a partner to Wan Lee
Chan, for and on behalf of Wan Lee Chan⁄‰. The issue arose was whether
the bill of sale issued by the firm was valid and binding on the firm.
The Court held that: A partner in a firm had an implied authority to issue a
bill of sale on behalf of other partners. Therefore, the bill of sale was valid
and binding on the firm.
According to Section 9 of the Partnership Act 1961, where one partner pledges
the credit of the firm for a purpose apparently not connected with the firm's
ordinary course of business, the firm is not bound, unless he is in fact specially
authorised by the other partners. However, this section does not affect any
personal liability incurred by an individual partner.

This means, a partner cannot misuse the trust given to him by the firm to make
debt which is not connected with the firm's business. The partner who misuse the
trust shall be personally liable unless he has been given the express authority to
do as such.
For instance, A and B are partners carrying on business of printing and selling
'batik'. A, without the knowledge of B bought a dishwasher under the firmÊs
name. The supplier has requested payment from the firm. In this case, B may
deny liability under Section 9 and A would be personally liable. In other words,
A cannot bind the firm because his act was not carried out within the usual
course of the partnership business. Another example where a firm will not be
liable is where a partner issues the firm's cheque for the purpose of settling
personal debt.
10.3.2 Liability of Partners

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

According to Section 11 of the Partnership Act 1961, „every partner in a
firm is liable jointly with the other partners for all debts and obligations of

the firm incurred while he is a partner; and after his death his estate is also
severally liable in a due course of administration for such debts and
obligations, so far as they remain unsatisfied but subject to the prior
payment of his separate debts.‰
Section 11 provides joint liability of partners in matters concerning

contracts entered into by the firm with third parties. The joint liability
under this section means that every partner is liable for all debts and
obligations of the firm. If A, B and C who are partners in a printing business
bought a printing machine worth of RM15,000 by credit, A, B and C shall be
jointly liable for the payment of the sum.
In the case of Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924)
4 FMSLR 292, a partnership has been formed by six partners including
the appellant. Three of the partners borrowed RM10,000 from a third
party by effecting a promissory note. The loan was guaranteed by the
respondent (Chan Kang Swi). Later, the firm failed to pay the debt and
Chan was called to pay for the debt on his own account. He then
initiated action against the six partners for recovery of his money and
five partners accepted their liability, except the appellant.
The Court decided that: The debt was a firmÊs debt and was obtained
for the purpose of partnership. The partners who signed the promissory
note had acted for the firm and they were authorised to do so.
Therefore, the firm or the six partners were liable.
Section 11 also provides the liability of a deceased partner. Under the

provision, the deceased partner is jointly liable for the firmÊs debt incurred
during his term as a partner of the firm. This means if a creditor sues the
firm for the firmÊs debt but fails to recover full satisfaction of his claim, he
can recover from the administrator of the estates of the deceased partner.
However, payment to the creditor is subject to the settlement of the
deceased partnerÊs personal debt, if any.
(b) Tortious Liability

Section 12 of the Partnership Act 1961 provides for liability of firm for
wrongs or tortious liability of partners:
”Where, by any wrongful act or omission of any partner acting in the

ordinary course of the business of the firm or with the authority of his co-
partners, loss or injury is caused to any person not being a partner in the

firm, or any penalty is incurred, the firm is liable therefore to the same
extent as the partner so acting or omitting to act.”
Tort is a civil wrong. The examples of tortious acts are nuisance,
defamation, trespass and negligence. In partnership, tort may occur in the
following situation. For instance A, B and C are partners carrying out
business of repairing electrical equipment. C repaired a washing machine
for a customer but due to his negligence, the customer was electrocuted
when using the washing machine. In this case, C was negligent in
performing his work and therefore, the firm and other partners were liable
to the customer.
In Hamlyn v. Houston & Co [1903] 2 KB 82, H and S were partners in a

firm. H bribed a clerk of another firm to get secret information on
contracts and tenders of the said firm.
The Court held that: H, as the partner, had done illegitimately that
which was part of his business to do legitimately. Hence, the firm was
liable for his act.
In the above case, the firm was liable because the bribe was part of the
firmÊs money and such information was for the purpose of the partnership
business and would have been legitimate if obtained by proper means.
(c) Liability for improper use of trust property

Liability for improper employment of trust property for partnership
purposes is provided under Section 15 of the Partnership Act 1961. It
provides that:
„If a partner, being a trustee, improperly employs trust property in the

business or on the account of the partnership, no other partner is liable for
the trust property to the persons beneficially interested therein:
Provided as follows:
(i) this section shall not affect any liability incurred by any partner by
reason of his having notice of a breach of trust; and
(ii) nothing in this section shall prevent trust money from being followed
and recovered from the firm, if still in its possession or under its
control.‰
For example, A, B and C are partners of a firm. A who has been appointed
as a trustee, improperly uses the trust property in the business. Other
partners, B and C are not liable for the trust property. However, if B and C

have notice of a breach of trust, they cannot avoid liability and the trust
money may be recovered from the firm if it is still in possession and under
the control of the firm.
In Ex parte Heaton (1819) Buck 386, a father and sons were partners in a
firm. The sons used the trust property for the purpose of the firmÊs
business. When the firm became bankrupt, the Court held that the
money which had been misappropriated could not be recovered from
the partnership property because the father had no knowledge of the
breach of trust committed by his sons.
(d) Liability for holding out

A person who is not a partner of a firm may become liable for the firms
debt if he represents himself or allow himself to be represented as a partner
in the firm. He will therefore be liable like a partner to the persons who give
credit to the firm. Section 16 of the Partnership Act 1961 provides:
„Every one who by words spoken or written or by conduct represents

himself, or who knowingly suffers himself, to be represented, as a partner
in a particular firm is liable as a partner to any one who has on the faith of
any such representation given credit to the firm, whether the representation
has or has not been made or communicated to the person so giving credit
by or with the knowledge of the apparent partner making the
representation or suffering it to be made:
Provided that where, after a partner's death, the partnership business is

continued in the old firm-name, the continued use of that name or of the
deceased partner's name as part thereof shall not of itself make his
executor's or administrator's estate or effects liable for any partnership
debts contracted after his death.‰
The liability is based on the principle of estoppel. When a person makes a

representation that induces third party to believe and rely on such
representation that he is a partner, the person is estopped from denying or
contradicting the statement.
For instance, A and B are partners of a saloon business. A is entrusted to

look after the account of the firm while B is in charge of the administration
of the firm. During the course of the business, they employ C as the
customer relations officer. One day, D, a salesman, came to the saloon, and
introduced a slimming product. C, who was at the saloon introduced

himself as a partner and expressed his interest in the product. Relying on

CÊs representation, D agreed to sell the product on credit to C. In such
situation, C was a partner by holding out and is liable for the payment of
the product supplied to the firm.
Whether A and B are jointly liable with C depends on their knowledge of

the transaction. If the firm or the partners knew about CÊs contract on behalf
of the firm and did not deny it in due course, then the firm or partners
would be jointly liable for the payment of the product to D. But if they have
no knowledge about the contract, then C would be personally liable as a
partner for holding out.
In the case of Re Buchanan & Co. (1876) 4 QSCR 202, if the holding out
or representation is made without the knowledge or consent from the
real partner, only the person holding out as a partner shall be liable to
the third party acting in reliance of the representation.
Section 16 of the Partnership Act 1961 further states that,

„where, after a partner's death, the partnership business is continued in the
old firm-name, the continued use of that name or of the deceased partner's
name as part thereof shall not of itself make his executor's or
administrator's estate or effects liable for any partnership debts contracted
after his death.‰
This means the use of the deceased name for the partnership business does
not constitute holding out.
(e) Liability for criminal offences

Any partner who commits criminal offences shall be personally liable.
Other partners shall not be liable unless there is evidence to prove their
participation in the commission of the crime.
In the case of Chung Shin Kian & Anor v. Pendakwaraya [1980] 2 MLJ
246, two partners in a firm had used a trade name („Texwood‰)
belonged to another company on their products. There was no evidence
to prove that the second appellant was involved in the crime, except as
to become a partner in the business. Thus, the appeal of the second
appellant was allowed.

(f) Liability of incoming and outgoing (retiring) partners

A person who is admitted as a partner into a firm is not liable for liabilities
incurred before he became a partner. According to Section 19(1) of the
Partnership Act 1961, „a person who is admitted as a partner into an
existing firm does not thereby become liable to the creditors of the firm for
anything done before he became a partner.‰
For a person retiring from the firm, he is not free from liabilities before his
retirement. He remains liable for the partnership debts incurred before his
retirement, as provided under Section 19(2) of the Act, „a partner who
retires from a firm does not thereby cease to be liable for partnership debts
or obligations incurred before retirement.‰ A retiring partner may only be
discharged from liabilities by a novation agreement between himself, the
new firm and the creditors.
In the case of Duke v. Brewer (1848) 2 Car. & Ker. 828, it was held that for
a new incoming partner, if the liability was for a continuous contract
(which was made before he became a partner and continue to exist after
he became a partner), then he shall be liable for the same.
SELF-CHECK 10.2
(a) How can a partner bind the firm for his act?
(b) What is the liability of a partner in contracts?
(c) Are partners jointly liable in tortious liability?
(d) What is the liability of a partner in the case of improper use of
trust property in a firm?
(e) What is the effect of holding out by a person who is not a
partner?
(f) What are the liabilities of incoming and outgoing partners?
(g) Will a partner be liable for the criminal offence committed by
other partners?

ACTIVITY 10.2
Discuss the following problems:
(a) Chandra and Dewi are partners in a garage business. Chandra

provided the capital and only visits the garage twice a month
whereas Dewi works full time for the firm. The terms of the
partnership agreement provide that no partner shall incur any
debt exceeding RM10,000 without the consent of the other
partner; partners must purchase oil only from RushOil
Company; and partners must not involve in trading of second-
hand goods. In the course of running the firm, Dewi has bought
oil amounting to RM15,000 from RiverinOil Company and has
also bought a second-hand car on his own account but in the
name of the firm. Advise Chandra on his liability as a partner.
(b) Malik and Noor were partners in a firm, operating a Cyber Café
business. Malik made a friendly loan amounting to RM8,000
from Aiman as a capital for the business. The said loan was
guaranteed by Azmin. The firm failed to pay the loan and Azmin
had to pay instead. Then, Azmin took a civil action against both
partners, Malik and Noor to recover his money back. However,
Noor did not admit the said liability and decided to walk away
from the partnership. After Noor withdrew from the partnership,
Malik invited Jefri as a new partner to replace Noor. In helping to
settle the debt, Jefri intended to get a bank loan for the firm. In
dealing with the bank, he brought along his brother, Mr Zuki, a
well-known businessman and introduced his brother as one of
the partners in the firm. Believing the representation made by
Jefri, the bank agreed to approve the loan amounting to
RM50,000. However, the firm failed to pay the loan. Discuss the
liabilities of all parties involved by referring to the Partnership
Act 1961 and the relevant case-laws.
• Formation of partnership entails certain obligations and liabilities for the

partners.
• A partnership is the relation which subsists between persons carrying on a
business in common with a view of profit.

• Joint tenancy, tenancy in common, joint property, or part ownership does not
of itself form a partnership.
• The sharing of gross returns from a business does not of itself establish a
partnership.
• Payment of a debt out of profits of the business to a creditor by instalments
does not make the creditor a partner in the business.
• Remuneration to a servant or an agent of the business from the profit of their
employer's business does not make the servant or the agent a partner.
• Payment of an annuity to a widow or child of a deceased partner does not
make the widow or the child a partner in the business.
• Payment to a seller of the goodwill of a business in the form of a share of the
profits of the business does not make the seller a partner.
• A partnership is not a legal persona but a label used by a number of
individuals trading under that particular name.
• A partnership must be formed for a lawful purpose.
• A partner is competent to contract if he is an adult, of sound mind and has
not lost capacity to enter into contracts under any laws.
• Partnership agreement may be in the form of oral or written agreement.
• A partner has an authority to bind the firm if he carries out the partnership
business within his scope of authority.
• Every partner in a firm is liable jointly with the other partners for all debts
and obligations of the firm incurred while he is a partner.
• A person who is not a partner of a firm may become liable for the firms debt
if he represents himself or allow himself to be represented as a partner in the
firm.
• Any partner who commits criminal offences shall be personally liable.
• A person who is admitted as a partner into a firm is not liable for liabilities
incurred before he became a partner.

Partnership Contractual liability

Business in common Tortious liability
Profit Misappropriation
Articles of partnership Criminal liability
Registration Incoming and outgoing partner
Text Books:
• Wu M.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.).
Cases:
• Abdul Gaffoor v. Mohamed Kassim & Ors [1931-32] FMSLR 19.
• Badeley v. Consolidated Bank (1888) 38 ChD 238.
• Chan King Yue v. Lee & Wong [1962] 28 MLJ 379.
• Chung Shin Kian & Anor v. Pendakwaraya [1980] 2 MLJ 246.
• Commissioners of Inland Revenue v. LebusÊs Trustees [1964] 1 All ER 475.
• Cox v. Coulson (1916) 114 LT 599.
• Davis v. Davis (1894) 70 LT 265.
• Duke v. Brewer (1848) 2 Car. & Ker. 828.
• Ex parte Heaton (1819) Buck 386.
• Hamlyn v. Houston & Co [1903] 2 KB 82.
• Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223.
• Mercantile Credit Ltd. v. Garrod [1962] 3 All ER 1103.
• Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924) 4 FMSLR 292.
• Rawlinson v. Clarke (1860) 15 M&M 292.

• Re Buchanan & Co. (1876) 4 QSCR 202.

• Re Young Ex p Jones (1896) 75 LT 278.
• William Jacks & Co. (Malaya) Ltd v. Chan & Yong Trading Co (1964) MLJ
105.

Topic X Law of
11 Partnership
(Part II)
LEARNING OUTCOMES
1. Explain the rights, duties and liabilities of partners;
2. Identify the obligations of partners to one another;
3. Discuss the rules on partnership property;
X4. Identify the grounds for dissolution of partnership; and
5. Explain the consequences of dissolution of partnership.
X INTRODUCTION
The previous topic discusses and explains the meaning of partnership, the
important characteristics of partnership, the rules on formation of partnership,
the relations of partners to outsiders and the liabilities of partners to third parties.
As a continuation, this topic focuses on:
• the relation of partners to one another;

• the mutual rights and duties of the partners;
• the liabilities of incoming and outgoing partners;
• the assignment of a partner's share in the partnership property; and
• the dissolution of partnership.

182 X TOPIC 11 LAW OF PARTNERSHIP (PART II)
11.1 RELATIONSHIP BETWEEN PARTNERS

The relationship between partners may be regulated by a partnership agreement
made by the partners which outlines the rights and duties and other terms
relating to business management, division of capital and profits of each partner,
etc. The provisions contained in Part IV (Sections 21 to 33) of the Partnership Act
1961 will only apply where partners did not provide the terms of partnership in
their partnership agreement. Section 21 of the Partnership Act 1961 provides that
the mutual rights and duties of partners, whether ascertained by agreement or
defined by the Act, may be varied by the consent of all the partners and such
consent may be either expressed or inferred from a course of dealing. Above all,
the principle of utmost good faith towards each other is implicit in the
partnership agreement.
11.1.1 Mutual Rights and Duties of Partners

In the absence of a specific partnership agreement between the partners, the
following provisions relating to rights and duties of partners are found in Section
26 of the Partnership Act 1961.
(a) Every partner is entitled to equal share of capital and profits of the
business, and must contribute equally to losses.
(b) Every partner who made any payment and incurred personal liabilities in
the course of the firmÊs business is entitled to be indemnified by the firm.
In the case of Kok Hok Leong & Anor v. Seow Kah Cheng & Anor
(1950) 16 MLJ 87, the appellant and respondent were partners in a firm
which has been sued for breach of contract and ordered to pay for
damages of RM4,246.50. The respondent engaged a solicitor and
managed to reduce the payment of damages in the legal suit. When
the partnership was dissolved, the court ordered the legal fees
incurred by the respondent to be paid out of the partnership assets.
The appellant refused to pay and went for appeal.
The Court rejected the appeal on the ground that the respondentÊs
action in the defence was an act to protect the firmÊs assets. Therefore,
he was entitled to be indemnified from the firm's assets.

TOPIC 11 LAW OF PARTNERSHIP (PART II) W 183
(c) Every partner who made any advance for the purpose of the firm's
business, beyond the capital amount he subscribed is entitled to 8% interest
per annum from the date of the payment of the advance.
(d) No partner is entitled to interest on capital before the ascertainment of

profits.
In Rishton v. Grissell (1868) LR 5 Eq 326, the Court held that a

principal in a business was not entitled to the interest on capital until
the employees and the agents remuneration has been ascertained.
(e) Every partner may participate in the management of the firm.
In Kelly v. Tucker (1907) 5 CLR 1, K and T had entered into a

partnership agreement verbally whereby they agreed to involve in
the business of buying horses from Australia and to be sold in South
Africa. By the said agreement, T would provide the capital while K
was entrusted to manage the business. In this case, TÊs participation
in the management of the partnership was denied by the agreement
of both parties.
(f) No partner is entitled to remuneration for acting in the partnership

business.
Reason being is the existence of the fiduciary relationship between partners.

Thus, any partner who is assigned to manage the business is duty bound to
exercise such duty for the interest of the partnership. The partners are not
entitled to any salary or wages because they are performing their duties as
partners in the course of the partnership business.
(g) No partner may introduce another (new) partner without the consent of
other existing partners.

In Wong Peng Yuen v. Senanayake [1962] 1 MLJ 204, the defendant

and Goh were partners in a share-brokerage firm. On 26/3/59, they
signed a partnership agreement whereby Goh transferred part of his
interests in the partnership to his two children who were minors. On
3/4/59, Tan join the partnership as a new partner and on 30/4/59 the
plaintiff paid the defendant a sum of RM20,000 in consideration of the
firm taking him as a partner. The plaintiff then acted as if he was a
partner in the firm. Later, the firm suffered unexpected losses and
when the firm was dissolved, the plaintiff claimed for the return of
RM20,000 he had paid on the ground that he was not a partner
because Tan and the children of Goh had never agreed to take him as
a partner in the firm.
The Court held that: There was evidence to show that Tan's consent
had been obtained and the consent from GohÊs children were not
necessary. The agreement signed on 26/3/59 was only a transfer of
GohÊs interests in the partnership but not his right as a partner in the
firm. Therefore, the plaintiff had no right to claim his money back.
(h) The majority partners may decide any differences as to ordinary matters
connected with the firm's business but the changes in the nature of the
firm's business must be made with consent of all the existing partners.
In Highley v. Walker (1910) 26 TLR 685, there were three partners in a

firm, carrying on business in worsted clothes. Two of the partners
agreed to train one of the partner's son in the business. The plaintiff
opposed to the agreement and applied to the court for an injunction to
prevent the two partners from proceeding with their plan. The court
dismissed the application on the ground that the dispute or
disagreement between partners is usual in a partnership business.
Thus, majority agreement is sufficient to resolve the dispute.

However, in the case of Tham Kok Cheong & Ors v. Low Pui Heng
[1966] 2 MLJ 52, the Court held that the act of the first, second and
third partners who sold the partnership business to a company
without informing the fourth partner was invalid.
(i) The partnership books are to be kept at the place of partnership business, or
at the principal place if there is more than one place of business.
In Gan Khuan v. Tan Jin Luan [1939] MLJ 286, the Court held that the
right to examine and make copies of the partnership books is not
limited to partners. The right can be exercised through an authorised
agent appointed by the partners.
It is important to note that Section 26 of the Partnership Act 1961 is only

applicable in the absence of the partnership agreement between the partners. In
the existence of the partnership agreement, the above provisions are not
applicable.
11.1.2 Obligations of Partners to Act in Utmost Good

Faith
Every partner must act honestly because the relationship between partners is
based on the principle of uberrimae fidei (utmost good faith). Further obligations
of partners in a firm are provided in the following provisions; Section 30, 31 and
32 of the Partnership Act 1961.
(a) Under Section 30, every partner is obliged to render true accounts and full
information on all things affecting the partnership.
In Law v. Law (1904) All ER 526, a partner transferred part of his shares
to another partner for £21,000. The partner who bought the shares knew
that the partnership assets comprised of securities and charges but
concealed the facts from the partner's knowledge.
The Court held that: The partner who had the information must
disclose it; otherwise the sale of the shares may be set aside.

(b) According to Section 31, every partner who uses the partnership property,
name or business connection, or involve in any transaction concerning the
partnership, without the consent of other partners, must account to the firm
for any secret profit or benefit derived by him.
In Pathirana v. Ariya Pathirana [1967] 1 AC 233, a dispute arose

between two partners who were the marketing agents for Caltex Ceylon
company. The defendant gave three months notice to terminate the
partnership. However, before the period of the notice ended, the
defendant entered into a new agency contract with Caltex under his
own name.
The Court held that: The profit gained by the defendant from the
agency contract belonged to the firm because the defendant had used
the firmÊs goodwill to obtain the new contract before the partnership
was dissolved.
(c) Section 32 provides the obligation of a partner not to compete with the firm
in business of the same nature without consent of the other partners. Thus,
if a partner opens a competing business without the consent of other
partners, he must account for and render all profits made by him to the
firm.
In Ass v. Benham [1891] 2 Ch 244, a partner in a ship-brokerage firm

assisted in the incorporation of a ship building company using
information he obtained from the firm's business. He was then
appointed as a director in the said company and received a salary in
consideration for the services he rendered. Other partners claimed for
the benefit to be given to the firm.
The Court held that: Other partners had no right to claim for the
benefit since the ship building business was of different nature from
the ship-brokerage business.

11.2 INCOMING AND OUTGOING (RETIRING)

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

Gazette shall be notice to persons who had no dealings with the firm before the
date of dissolution or changed so advertised."

In the case of Re Siew Inn Steamship Co. [1934] MLJ 180, a retired partner had
inserted a notice of his retirement in several issues of a newspaper to which
certain old customers were proved to be regular subscribers. After his
retirement, these old customers lent money to the firm on the security of
promissory notes executed by the remaining partners. One of the lenders later
sued the retired partner on these notes, denying having actually seen notice of
his retirement in the papers.
The Court held that: The retired partner was liable on the notes, actual notice
being necessary so far as old customers were concerned.
In relation to dismissal under Section 27, the majority partners cannot expel any
partner unless a power to do so has been conferred by express agreement
between the partners.
11.3 ASSIGNMENT OF SHARE

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

SELF-CHECK 11.1
(a) What is the important principle implicitly provided in all

partnership agreements?
(b) What is the distribution of share of each partner in the capital,
profits and losses in the business?
(c) Is a partner entitled to be indemnified by the firm for his
personal liabilities?
(d) What is the right of a partner who gives advance to the firm for
its business?
(e) Can a partner participate in the management of the business and
receive wages or salary?
(f) What is the consequence of a partner who uses the partnership
property, name or business connection to make secret profit for
himself?
(g) What is the liability of a partner who competes with the firm in
business of the same nature without the consent of other
partners?
(h) Can a partner assign his share to other persons?

ACTIVITY 11.1

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

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

From the statutory provisions and the decided case-laws, the following
conclusions may be made:
(a) Whether the property brought into the firm is a partnership property or
property of an individual partner depends on the partnership agreement
between the partners.
In Miles v. Clark [1953] 1WLR 537, a photographer who carried out his
own business brought in a new partner who had many business
contacts. There was no clear agreement between the partners. Later, a
dispute arose between them and the partnership was dissolved.
The Court decided that: Since there was no clear agreement pertaining
to the use of the assets in the partnership, the assets were not
partnership properties but owned individually by the partners who
brought them into the firm.
(b) If there is no agreement provided for the partnership property, the partners
must have the intention to regard the property as a partnership property.
The property is intended to be a partnership property when it is purchased
using the partnership money, even though it was purchased under a
partnerÊs name. The property remains as a partnership property even
though it is not used for the partnership business.
In the case of Murtagh v. Castello (1881) T LR Ir 428, it was held that a

property bought using partnership asset, although not used in the
business, was regarded as a partnership property.
If the property is obtained using an individual partner's money, the property will
remain to be an individual partner's property.

In Ponnukon v. Jebaratnam [1980] 1 MLJ 283, the appellant had formed

a partnership with the respondent to develop a land into a housing
area. However, efforts to get the bank to purchase the land failed and
the respondent decided to purchase the land using his money. The
appellant applied for a court declaration that the respondent held the
land as a trustee to the partnership.
The court however dismissed the application on the following grounds:
• there was no agreement between the parties that the land was
purchased or owned as a partnership property;
• the intention of the firm was to develop the land and not necessarily
the land must be owned by the firm to carry out its business;
• the respondent personally financed the purchase of the land and

did not use any partnership money.
Therefore, the said land was owned by the respondent as his personal
property and it was not to be regarded as a partnership property.
(c) If certain asset is acquired for the firm, such asset is regarded as a
partnership property.
(d) In the absence of specific provisions or proots to show that the property is
intended for the partnership, then the property is regarded as the property
of an individual partner.
(e) The facts of every case will be considered in ascertaining whether the
property is a partnership property or property of an individual partner.
Consequently, in the execution of judgement, a creditor who has obtained

judgement against a firm may seize partnership property. But if a creditor
obtains judgement against an individual partner only, he cannot seize all the
partnership property. However, the creditor is entitled to obtain an order of court
charging that partner's interest in the partnership property (Section 25(1)(2)).

11.5 DISSOLUTION OF PARTNERSHIP

A firm ceased to exist when it is dissolved. This means all the firm's business
cease to operate upon dissolution of a partnership, except the obligations of the
partners to continue to do the necessaries for purpose of dissolution and
completing the incomplete activities. There are several ways in which a
partnership may be terminated as shown in the following table (Table 11.1):
Table 11.1: Dissolution of Partnership
By expiration of Section 34
term or notice Subject to any agreement between the partners, a partnership is
dissolved by the expiration of the term fixed, or by the termination
of an adventure or undertaking, or by any partner giving notice to
the other of his intention to dissolve the partnership.
By death, Section 35
bankruptcy, Subject to any agreement between the partners, every partnership
charge is dissolved by the death or bankruptcy of any partner.
A partnership may also be dissolved if any partner suffers his

share of the partnership property to be charged under this Act for
his separate debt.
By supervening Section 36
illegality A partnership is dissolved by the happening of any event which
makes it unlawful for the business of the firm to be carried on or
for the members of the firm to carry it on in partnership.
By court order Section 37(a)
When a partner is lunatic, or permanently unsound mind.
Section 37(b)
When a partner becomes permanently incapable of performing his
part in the partnership contract.
Section 37(c)
When a partner has been guilty of any conduct which affect
prejudicially the carrying on of the business.
Section 37(d)
When a partner wilfully or persistently commits a breach of the
partnership agreement, or conducts himself in a manner that is not
reasonably practicable for the other partner/s to carry on the
business in partnership with him.
Section 37(e)
When the partnership business can only be carried on at a loss.

Section 37(f)
Whenever any circumstance arises that render it just and equitable
(in the opinion of the court) for the partnership to be dissolved.
11.6 PARTNERSHIP ACCOUNTS SETTLEMENT

Unless there is a specific agreement between the partners, the rules to settle the
partnership accounts after dissolution are provided in Section 46 of the
Partnership Act 1961, as may be simplified below (Table 11.2):
Table 11.2: Partnership accounts settlement
Losses To be paid first out of: 1. Profits.

(including losses 2. Capital.
and deficiencies of 3. By the partners
capital) individually according to
their proportion in the
sharing of profits.
Assets of the firm To be applied in: 1. Paying debts and
(including sums liabilities of the firm to
contributed by the non-partners.
partners to make 2. Paying each partner
up losses or rateably what is due from
deficiencies of the firm to him for
capital) advances (other than the
capital).
3. Paying each partner
rateably what is due from
the firm in respect of
capital.
4. Ultimate residue (if any)
to be divided among the
partners according to the
division of profits.

SELF-CHECK 11.2
(a) What is meant by a partnership property?
(b) If a certain asset is acquired for the firm, is the property
regarded as a partnership property?
(c) If a property is obtained using an individual partnerÊs money,
is the property regarded as a partnership property?
(d) What are the ways of termination of a partnership?
(e) What is the effect of dissolution of partnership?
(f) What are the rules for the settlement of a partnership accounts
after dissolution, in absence of a specific agreement between
partners?
ACTIVITY 11.2
Discuss the following problems by applying the principle of law on

partnership:
(a) Gemilang & Co. is a trading firm comprises of four partners;

Joyce, Wan, Mulan and Sam. The partnership was established
under Wan's name. In the year 2000, Wan died and his widow
resumed his position as a partner. In 2005 the partners bought a
shop-house using partnership money. Mulan signed the
transaction with the consent of other partners. When Mulan died,
the three surviving partners applied for a court declaration that
the shop-house belonged to them, having still carrying on
business under the name of Wan. Decide whether the shop-
house is a partnership property. Why?
(b) M and D were partners in a law firm. The partnership agreement

provided that on the death of a partner during the partnership
period, the business and goodwill of the partnership should
become an exclusive right of the surviving partner. On 23.3.1927,
M served a notice of dissolution to D on the stated date. The
notice only arrived and received by D on 10.00 a.m. of
24/3/1927. Meanwhile M died at 3.15 a.m. on 24/3/1927. Decide
whether the partnership dissolved due to the notice or the death
of M.

• Every partner is entitled to equal share of capital and profits of the business,
and must contribute equally to losses.
• Every partner who made any payment and incurred personal liabilities in the
course of the firmÊs business is entitled to be indemnified by the firm.
• Every partner who made any advance for the purpose of the firm's business,
beyond the capital amount he subscribed is entitled to 8% interest per annum
from the date of the payment of the advance.
• No partner is entitled to interest on capital before the ascertainment of
profits.
• Every partner may participate in the management of the firm.
• No partner is entitled to remuneration for acting in the partnership business.
• No partner may introduce another (new) partner without the consent of other
existing partners.
• The majority partners may decide any differences as to ordinary matters
connected with the firm's business but the changes in the nature of the firm's
business must be made with consent of all existing partners.
• The partnership books are to be kept at the place of partnership business or at
the principal place if there is more than one place of business.
• Every partner must act honestly because the relationship between partners is
based on the principle of uberrimae fidei (utmost good faith).
• A partner may assign his share if there is no agreement among the partners
prohibiting the assignment.
• Whether a property brought into a firm is a partnership property depends on
the partnership agreement between the partners.
• All the partnership businesses cease to operate upon dissolution of a
partnership.
• A partnership may be dissolved by expiration of a partnership term or notice;
death, bankruptcy and charge; supervening illegality or court order.

Uberrimae fidei Assignment of share

Utmost good faith Partnership property
Incoming partner Dissolution
Outgoing (retiring) partner Partnership accounts
Text Books:
Cases:
• Ass v. Benham [1891] 2 Ch 244.
• Gan Khuan v. Tan Jin Luan [1939] MLJ 286.
• Highley v. Walker (1910) 26 TLR 685.
• Kelly v. Tucker (1907) 5 CLR 1.
• Kok Hok Leong & Anor v. Seow Kah Cheng & Anor (1950) 16 MLJ 87.
• Law v. Law (1904) All ER 526.
• Miles v. Clark [1953] 1WLR 537.
• Murtagh v. Castello (1881) T LR Ir 428.
• Ong Kian Loo v. Hock Wah Trading Co. & Ors [1990] 1 MLJ 315.
• Pathirana v. Ariya Pathirana [1967] 1 AC 233.
• Ponnukon v. Jebaratnam [1980] 1 MLJ 283.
• Re Siew Inn Steamship Co. [1934] MLJ 180.
• Rishton v. Grissell (1868) LR 5 Eq 326.
• Tham Kok Cheong & Ors v. Low Pui Heng [1966] 2 MLJ 52.
• Wong Peng Yuen v. Senanayake [1962] 1 MLJ 204.

T op i c X Law of Sale
12 of Goods
(Part I)
LEARNING OUTCOMES
1. Define the meaning of goods;
2. Describe the classification of goods;
3. Differentiate a contract of sale and an agreement to sell;
4. Explain the implied terms in a contract of sale of goods; and
5. Identify the importance of transfer of property in the goods.
X INTRODUCTION
The Sale of Goods Act 1957 (Revised 1989) is the statute applicable to sale of
goods in Peninsular Malaysia. For Sabah and Sarawak, the law of sale of goods is
governed by Section 5(2) of the Civil Law Act 1956. It provides that,
„the law to be administered shall be the same as would be administered in

England in the like case at the corresponding period.‰
In effect, Sabah and Sarawak continue to apply principles of English law relating
to the sale of goods. The Sale of Goods Act 1957 was enacted based on the
English Sale of Goods Act 1893 (which was replaced by the Sale of Goods Act
1979). The Sale of Goods Act 1957 applies to contracts for the sale of all types of
goods including second-hand goods, and to commercial and private sales,
wholesale and retail. The general law of contract will continue to apply to
contracts for the sale of goods as Section 3 of the Sale of Goods Act 1957 expressly

TOPIC 12 LAW OF SALE OF GOODS (PART I) W 199
provides for the continual application to contracts for the sale of goods of the
provisions of the Contracts Act 1950 Âin so far as they are not inconsistent with
the express provision of this Act.
12.1 DEFINITION OF GOODS
Goods under Section 2 of the Sale of Goods Act, 1957 means „every kind of
movable property other than actionable claims and money and includes stocks
and shares, growing crops, grass, and things attached to or forming part of the
land which agreed to be severed before sale or under the contract of sale.‰
In Section 6 of the Sale of Goods Act 1957, goods which form the subject of a
contract of sale may be either existing goods or future goods. Existing goods are
goods already owned or possessed by the seller and may be either specific or
unascertained goods.
• Goods are specific if they are identified and agreed upon at the time a
contract of sale is made.
• Unascertained goods are goods not identified and agreed upon at the time a
contract of sale is made.
• Ascertained goods are those unascertained goods which have been identified
and appropriated to the contract after the contract has been made.
• Future goods mean goods to be manufactured or produced or acquired by
the seller after the making of the contract of sale.
12.2 CONTRACT OF SALE
A contract of sale is the transfer of ownership of the goods to the buyer for a
money consideration. Section 4(1) of the Sale of Goods Act 1957 defines a
contract of sale of goods as,
„a contract whereby the seller transfers or agrees to transfer the property in

goods to the buyer for a price‰.
A contract of sale includes a sale and an agreement to sell.
What is the difference between a sale and an agreement to sell? According to

Section 4(3) of the Sale of Goods Act 1957,

200 X TOPIC 12 LAW OF SALE OF GOODS (PART I)
„where under a contract of sale the property in the goods is transferred from the
seller to the buyer, the contract is called a sale, but where the transfer of the
property in the goods is to take place at a future time or subject to some
condition thereafter to be fulfilled, the contract is called an agreement to sell.‰
Under Section 4(4),
„an agreement to sell becomes a sale when the time elapses or the conditions are
fulfilled subject to which the property in the goods is to be transferred.‰
The above provisions provide that what distinguish a sale from an agreement to
sell is in terms of ownership or Âthe property in the goodsÊ. A contract is a sale
when the ownership or the property in the goods passes to the buyer, and it is an
agreement to sell where the transfer of the property in the goods is to take place
at a future time or subject to some condition to be fulfilled.
An ownership must also be distinguished from possession. A person who

possesses certain goods may not be the owner of the goods. Or an owner of
certain goods may not have the goods in his possession.
In an agreement to sell, the goods still belong to the seller. Consequently, if the
buyer breaches an agreement to sell, the seller may sue for unliquidated
damages. If the seller breaches an agreement to sell, the buyer has only a
personal remedy for damages against the seller. Whereas in a sale, if the buyer
fails to pay, the seller can sue for the contract price because ownership has
passed to the buyer.
12.3 TERM OF CONTRACT

The conditions and warranties in contract of sale of goods are provided in
Section 12 of the Sale of Goods Act 1957. A condition under Section 12(2) is,
„a stipulation essential to the main purpose of the contract, the breach of which
gives rise to a right to treat the contract as repudiated‰.

A warranty under Section 12(3) is,
„a stipulation collateral to the main purpose of the contract, the breach of which
give rise to a claim for damages but not a right to reject the goods and treat the
contract as repudiated.‰
According to Section 12(4),
„whether a stipulation in a contract of sale is a condition or a warranty depends

in each case on the construction of the contract. The stipulation may be a
condition, though called a warranty in the contract.‰
There are circumstances which permit the buyer to treat a breach of condition as
a breach of warranty, as provided in Section 13(1) of the Sale of Goods Act, 1957.
It provides that,
„where a contract of sale is subject to any condition to be fulfilled by the seller

the buyer may waive the condition or elect to treat the breach of the condition as
a breach of warranty and not as a ground for treating the contract as repudiated.‰
However, under Section 13(2), where a contract is not severable and the buyer
has accepted the goods or part thereof, the breach of condition must be treated as
a breach of warranty. Similarly, in a case where the contract is for specific goods
and the property has passed to the buyer. Therefore, the buyer cannot reject the
goods and repudiate the contract.
12.4 IMPLIED TERMS

Implied terms are those conditions and warranties implied by the statute into
particular contracts. The terms, though not expressly found in the contract, are
generally accepted incidents of the contract and therefore imported by the courts.
The kind of terms implied by statute for the contract of sale of goods are the
conditions and warranties provided under the Sale of Goods Act 1957. These
conditions and warranties implied in a contract of sale of goods bind the
contracting parties, the buyer and the seller.

However, according to Section 62 of the Sale of Goods Act 1957,
„this right, duty or liability that would arise under a contract of sale by
implication of law may be negatived or varied by express agreement or by the
course of dealings between the parties, or by usage, if the usage is to bind both
parties to the contract.‰
This means the parties to a contract of sale may exclude the implied terms by the
express agreement or by previous dealings or by usage.
12.4.1 Title
Section 14 of the Sale of Goods Act 1957 provides the implied undertaking as to
title in a contract of sale. According to the provision, „unless the circumstances of
the contract indicate a different intention, there is:
(a) An implied condition on the part of the seller that in the case of a sale, he
has a right to sell the goods, and in the case of an agreement to sell, he will
have a right to sell the goods at the time when the property or ownership is
to pass.
(b) An implied warranty that the buyer shall have and enjoy quiet possession
of the goods.
(c) An implied warranty that the goods shall be free from any charge or
encumbrance in favour of any third party not declared or known to the
buyer before or at the time when the contact is made.
A breach of condition entitles the buyer to treat the contract as repudiated and
recover the price in full even though he has used the goods. This is because the
buyer pays the price of the goods in order to enjoy the ownership as well as the
use of the goods.
In the case of Rowland v Divall [1923] 2 KB 500, the plaintiff bought a car from
the defendant. After using the car for four months, the plaintiff discovered
that it was a stolen car and he had to return it to the true owner.
The Court of Appeal held that: The defendant had breached the condition as
to title and the plaintiff could recover the full price because of total failure of
consideration.

12.4.2 Sale of Goods by Description

The rule relating to sale of goods by description is provided in Section 15 of the
Sale of Goods Act 1957. It provides that,
„where there is a contract for the sale of goods by description, there is an implied
condition that the goods shall correspond with the description.‰
In addition,
„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.‰
Sale of goods by description covers all cases where the buyer has not seen the
goods but is relying on the description alone, for example, goods ordered from a
catalogue or if ordered over the counter, by a trade name. Thus it includes all
contracts for the sale of unascertained goods and sale of specific goods which the
buyer has not seen it prior to the contract.
In the case of Nagurdas Purshotumdas & Co. v Mitsui Bussan Kaisha Ltd
(1911) 12 SSLR 67, previous contracts between the parties for the sale of flour
had been sold in bags bearing a well-known trade mark. Further flour was
ordered described as „the same as our previous contract‰. Flour identical in
quality was delivered but it did not bear the same well-known trade mark. It
was held that it did not comply with the description.
In another case of Beale v. Taylor [1967] 1 WLR 1193, the seller advertised a
car as „Herald Convertible, white, 1961, twin carb⁄‰. The buyer saw the car
before he agreed to buy. Later, he discovered that the rear of the car was part
of a 1961 Herald Convertible while the front half was part of an earlier model.
It was held that he was entitled to claim damages for breach of the condition.

In the case of Moore & Co v. Landauer & Co [1921] 2 KB 519, the buyers
were entitled to reject the goods because half of the cases contained only 24
tins, even though the total quantity was met. The contract was for 3100
cases of Australian canned fruit packed ’30 tins to case’.
12.4.3 Fitness for Purpose and Merchantable Quality

Section 16 of the Sale of Goods Act 1957 provides that there is no implied
warranty or condition as to the quality or fitness for any particular purpose of
goods supplied under a contract of sale except in the following situations:
(a) Goods must be reasonably fit for the purpose for which the buyer wants
them (Section 16(1)(a)).
(b) Goods must be of merchantable quality (Section 16(1)(b)).
(a) Goods must be reasonably fit for the buyerÊs purpose.

„Where the buyer, expressly or by implication, makes known to the seller
the particular purpose for which the goods are required, so as to show that
the buyer relies on the sellerÊs skill or judgement, and the goods are of a
description which is in the course of the sellerÊs business to supply
(whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be reasonably fit for such purpose.‰
But in the case of a contract for the sale of a specified article under its patent
or other trade name, there is no implied condition as to its fitness for any
particular purpose.
The buyer may invoke Section 16(1)(a) if he makes known to the seller the
particular purpose for which he acquires the goods and the buyer is relying
on the sellerÊs skill and judgement. The goods must also be a description
which is in the course of the sellerÊs business to supply and if the goods are
specific, they must be bought under their trade name or patent.

The above requirements are explained in the following cases:
In Griffiths v. Peter Conway Ltd. [1939] 1 All ER 685, a woman with

an abnormally sensitive skin bought a Harris Tweed coat without
disclosing to the seller about her abnormality. She could not claim
under this section because the coat would not harm a normal person.
Thus, the buyer must clearly indicate the special purpose for which the
goods are to be used. Otherwise, there is no breach of the implied condition
if the goods are suitable for their general and normal purpose. If the
description of the goods is only for one purpose, then it requires no further
indication. For example, a hot water bottle is meant to contain hot boiling
water; if it breaks upon filling of hot water, then it is not fit for its purpose.
In the case of Cammell Laird & Co v. Manganese Bronz and Brass Co

Ltd [1934] AC 402, there was a contract by A to build a propeller for B
in accordance with BÊs specification and to fit a particular ship and its
engine. The propeller supplied complied with the specification and
design but did not suit the shipÊs engine. A was held liable for breach of
an implied condition since the buyer had informed the seller of the
purpose for which he needed the goods and relied on the sellerÊs skill
and judgement to provide them.
In Baldry v. Marshall [1925] 1 KB 260, the buyer asked the dealer for a
car suitable for touring and the dealer recommended a Bugatti car. A
contract for the sale of the car was made. Later, the buyer found that the
car was unsuitable for touring.
The Court of Appeal held that: The dealer was liable because the buyer
had relied on the dealerÊs judgement in selecting a suitable car for the
specific purpose stated by the buyer (even though the car was bought
under its trade name).

Hence, if the buyer purchases goods under its trade name but at the same
time relies on the sellerÊs recommendation, it means the buyer is still
relying on the sellerÊs skill. But if the buyer purchases specific goods under
a trade name and gives the impression that he is not relying on the sellerÊs
skill, then he cannot claim under this section.
(b) Goods must be of merchantable quality

„Where goods are bought by description from a seller who deals in goods
of that description (whether he is the manufacturer or producer or not),
there is an implied condition that the goods shall be of merchantable
quality.‰
However,
„if the buyer has examined the goods, there shall be no implied condition as
regards defects, which such examination ought to have revealed.‰
ÂMerchantable qualityÊ means the goods are fit for the particular use to
which they were sold. Therefore, if they are defective for their use, they are
considered unmerchantable.
For implied condition as to merchantable quality, the buyer need not make
known to the seller the particular purpose for which he requires the goods.
The section only requires the goods to be bought by description and bought
from a seller dealing with the goods of that description.
Where goods are sold under their trade name, the implied condition as to
merchantable quality is applicable although the implied condition as to
fitness is excluded.
In Wilson v. Ricket, Cockerall & Co. Ltd [1954] 1 All ER 868, fuel by its
trade name ÂCoaliteÊ was ordered from a fuel merchant. The
consignment was contaminated in that a detonator was embedded in
the coal, resulting in an explosion in the fire-place when used.
The Court held that: The consignment as a whole was unmerchantable,

having defects making it unfit for burning.
In the Proviso to Section 16(1)(b), the implied condition does not apply
„where the buyer has examined the goods as regards defects which such
examination ought to have revealed.‰ This means if the buyer has

conducted some examination before or at the time of the contract, the buyer
cannot later complain about the defects which would be revealed by a
proper examination.
In the case of Thornett & Fehr v. Beers & Sons [1913] 1 KB 486, the
buyer had conducted a superficial look at the outside of some barrel of
glue. It was held that there was an examination and thus the implied
condition as to merchantable quality did not apply.
12.4.4 Sale by Sample

As provided under Section 17 of the Sale of Goods Act 1957, „in a contract for the
sale of goods by sample, there is an implied condition:
(a) That the bulk shall correspond with the sample in quality;
(b) That the buyer shall have reasonable opportunity of comparing the bulk
with the sample; and
(c) That the goods shall be free from any defect rendering them
unmerchantable which would not be apparent on reasonable examination
of the sample.
The three conditions above are independent of one another. If the bulk
corresponds with the sample but there is a latent defect rendering the goods
unmerchantable, the buyer is still entitled to reject them.
In the case of Drummond v. Van Ingen (1887) 12 App. Cas. 284, the cloth
supplied by the seller was equal to sample previously examined but because
of a latent defect not discoverable by a reasonable examination, the Court
found the seller in breach of the condition.

SELF-CHECK 12.1
(a) What is the meaning of existing goods, future goods, specific

goods and unascertained goods? Provide examples in your
explanation.
(b) What is the difference between a sale and an agreement to sell?
(c) What are the kind of implied conditions and warranties
incorporated in a contract of sale of goods?
(d) What is the effect of breach of implied condition and warranty in
a contract of sale of goods?
(e) Can the party to the contract of sale of goods exclude the implied
terms?
ACTIVITY 12.1
a) Michael and his wife Betty, were busy shopping for new
furniture for their new house. Three days before moving, they
visited a furniture shop Antique Design. Betty was very
interested with a set of sofa from Italy worth of RM15,000.00.
The set was made from soft leather, brown in colour and consist
of one coffee table and they had agreed to buy the set. Both the
husband and wife had also agreed to buy a double bed for their
daughters. Michael informed the seller that he wanted a double
bed made from a good quality of wood. The seller ensured
Michael that he would meet MichaelÊs request, as he was an
expert and experienced in selling furniture. After payment, the
seller promised to deliver the furniture on the day that they
were supposed to move into their new house. Michael and Betty
also went to Cool Air-Cond, a shop selling air-conditioner. The
seller managed to attract Michael to buy a portable air-
conditioner at the price of RM2,000.00 and with a guarantee that
the air-conditioner could be used for the next five years without
any problem. After checking the goods and satisfied with its
condition, Michael made a payment. The seller promised to
deliver the air-conditioner on the day they moved to the new
house.

On the day of moving, all of the goods ordered by Michael and

Betty were delivered. Nevertheless, they were disappointed to see
that the set of sofa that was delivered was not of brown colour and
did not include the coffee table and the double bed ordered was
not made of good quality wood. Meanwhile, the portable air-
conditioner that Michael bought produced a strong noise when it
was switched-on. Michael and Betty were very disappointed with
what had happened and seek your legal advice on what action can
be taken on the sellers of the goods.
b) B placed an advertisement in a local newspaper offering for a sale

of a second-hand car at RM40,000 o.n.o. The car was described as
„Toyota, late 2000‰ model. Q responded by offering to buy the car
at RM37,000. The offer was accepted by B. After driven the car for
almost three months, Q discovered that only the body of the car
was of „late 2000‰ model while the engine was from much earlier
model. Q now wishes to rescind the contract and seeks your
advice on the matter. Advise Q on her rights under the Sale of
Goods Act 1957.
b) Sally, a contestant in one of the top reality shows in TVReality was

preparing for the final contest to become the winner for the new
season 2008. Sally intended to engage a professional tailor to sew
the dress suitable for the contest. Sally consulted Robin, a well-
known fashion designer in town on the choice of fabric for the
dress because she had sensitive skin and would be allergy to
certain types of fabric. Sally also paid RM3,000 for the cost of the
dress. After the contest, Sally discovered red spots on her skin.
Sally went to see the doctor and she was told that her skin was
sensitive to the fabric used for the dress that she worn for the
contest. Sally went to see Robin and returned the dress for the
reason that the fabric used for the dress was not fit for the purpose
she made known to Robin and caused her skin complaint. Sally
also claimed for the refund of her money from Robin being the
cost of the dress and the medical expenses incurred by her. Decide
whether Sally could claim for the refund of her money from Robin
as well as the cost for her medical expenses.

12.5 TRANSFER OF PROPERTY IN THE GOODS

AND RISK
Property in the goods means title or ownership. The transfer of property in the
goods is very important because it determines the risk. As a general rule, the risk
passes when the property in the goods passes (notwithstanding whether delivery
has been made). Thus, the goods will remain at the sellerÊs risk until the property
in the goods is transferred to the buyer. When the title or ownership is
transferred to the buyer, then the goods are at the buyerÊs risk.
According to Section 26 of the Sale of Goods Act 1957,
„unless otherwise agreed, the goods remain at the sellerÊs risk until the property
therein is transferred to the buyer, but when the property therein is transferred to
the buyer, the goods are at the buyerÊs risk whether delivery has been made or
not:
Provided that where delivery has been delayed through the fault of either buyer
or seller, the goods are at the risk of the party in fault as regards any loss which
might not have occurred but for such fault.‰
This means, if delivery has been delayed through the fault of either party, the
goods are at the risk of the party in fault as regards any loss which might not
have occurred but for such fault.
12.5.1 Effects of the Contract

Since the risk passes when the property in the goods passes, is it essential to
know when does the title pass? Under the Sale of Goods Act 1957, Section 18 to
23 provides certain rules that determine the time when property in the goods
passes to the buyer.
(a) Sale of unascertained goods

Under Section 18 of the Sale of Goods Act 1957, where there is a contract for
the sale of unascertained goods, no property in the goods is transferred to
the buyer unless and until the goods are ascertained.
(b) Sale of specific or ascertained goods

the sale of specific or ascertained goods the property in them is transferred
to the buyer at such time as the parties to the contract intend it to be
transferred. Thus, the general rule is that title passes when the parties to a
contract of sale intend it to pass.

Unless a different intention appears, the following rules are the rules for
ascertaining the intention of the parties as to the time of passing of property
in the goods.
(c) Specific goods in a deliverable state

Under Section 20 of the Sale of Goods Act 1957, where there is an
unconditional contract for the sale of specific goods in a deliverable states
the property in the goods passes to the buyer when the contract is made. It
is immaterial whether the time of payment of the price or the time of
delivery of the goods is postponed.
For example, A agrees to buy a specific book entitled ÂBusiness LawÊ on

credit. The title in the book passes to A on the sale even though the
payment is postponed.
(d) Specific goods to be put into a deliverable state

the sale of specific goods and the seller is bound to do something to the
goods for the purpose of putting them into a deliverable state, the property
does not pass until such thing is done and the buyer has notice thereof.
For example, A agrees to sell a specific computer to B and promises to

install the specific software in the disk. The ownership in the computer
does not pass to B until A installs the specific software as promised and B
must know about the fact that A has done the installation.
(e) Specific goods in a deliverable state when the seller has to do anything
thereto in order to ascertain price
the sale of specific goods in a deliverable state, but the seller is bound to
weigh, measure, test, or do some other act or thing with reference to the
goods for the purpose of ascertaining the price, the property does not pass
until such act or thing is done and the buyer has notice thereof.
For example, A agrees to sell to B all the flour contained in a specific sack
for RM3 per kilogram. The title does not pass to B until A weighs the flour
and B knows that the flour has been weighed.

(f) Sale of unascertained goods and appropriation

the sale of unascertained or future goods by description and goods of that
description and in a deliverable state are unconditionally appropriated to
the contract, either by the seller with the assent of the buyer or by the buyer
with the assent of the seller, the property in the goods thereupon passes to
the buyer. The assent may be expressed or implied and may be given either
before or after the appropriation is made.
A contract for the sale of unascertained goods is an agreement to sell and

not a sale. Future goods mean goods to be manufactured or produced or
acquired by the seller after the making of the contract of sale.
ÂUnconditionally appropriated to the contractÊ in the provision above
means a clear act showing the intention to identify certain goods as
attached to the contract and without any condition. The duty to appropriate
may be placed on the buyer or the seller. Appropriation may involve the act
of selecting, separating or weighing from a bulk by the buyer or the seller,
and it must be approved by the other party. The appropriation must be
unconditional and it should pass property in the goods without further
requirements (such as payment or price).
Further, Section 23(2) of the Sale of Goods Act 1957 provides that where (in
pursuance of the contract), the seller delivers the goods to the buyer or to a
carrier or other bailee for the purpose of transmission to the buyer, and
does not reserve the right of disposal, he is deemed to have unconditionally
appropriated the goods to the contract. The effect is that property in the
goods passes to the buyer at the time when the goods are handed over to a
carrier (for example, a transportation company, like shipping, trucking or
railway). The carrier is the buyerÊs agent for the purpose of delivery. But if
the carrier is the agent of the seller, then property in the goods will not pass
until the goods are actually delivered to the buyer.
(g) Goods sent on approval or „on sale or return‰

Under Section 24 of the Sale of Goods Act 1957, when goods are delivered
to the buyer on approval or „on sale or return‰, or other similar terms, the
property in the goods passes to the buyer:
(i) when the buyer signifies his approval or acceptance to the seller or
does any other act adopting the transaction;
(ii) if he does not signify his approval or acceptance to the seller but
retains the goods without giving notice of rejection, then, if a time has

been fixed for the return of goods, on the expiration of such time, and
if no time has been fixed, on the expiration of a reasonable time.
Under the second situation above, if a time is fixed for the return of the
goods, then property in the goods passes upon the expiration of the time.
But if no time is fixed, property in the goods passes upon the expiration of a
reasonable time.
SELF-CHECK 12.2
(a) What is the meaning of property in the goods?
(b) What is the significant of the transfer of title or ownership
in the goods?
(c) When does the risk pass to the buyer in a contract of sale
of goods?
(d) How would you determine the time when the property in
the goods passes to the buyer?
(e) When is the property in the goods transferred to the buyer
in a contract for sale of unascertained goods?
(f) When is the title or ownership transferred to the buyer in a
contract for sale of a specific or ascertained goods?
ACTIVITY 12.2
Discuss the following question:
500 ton matric of flour belonging to a vendor were stored in a godown

belonging to Mr. Isaac. The vendor sold 200 ton matric of the flour to
Mr. Hans and gave him a delivery order addressed to Mr. Isaac. When
Mr HansÊ carrier arrived at the godown, Mr. Isaac had already set
aside the 200 ton matric of the flour. The carrier handed the delivery
order to Mr. Isaac who gave instructions for loading to commence.
Before the loading could commence, Mr. IsaacÊs godown was caught
by fire and it destroyed the whole stock of the flour. Discuss when did
the property in the goods pass and who shall bear the loss.

• A contract of sale is the transfer of ownership of the goods to the buyer for a
money consideration.
• Where the property in the goods is transferred from the seller to the buyer,
the contract is called a sale.
• Where the transfer of the property in the goods is to take place at a future
time or subject to some condition thereafter to be fulfilled, the contract is
called an agreement to sell.
• What distinguish a sale from an agreement to sell is in terms of ownership or
Âthe property in the goodsÊ.
• A condition is a stipulation essential to the main purpose of the contract, the
breach of which gives rise to a right to treat the contract as repudiated.
• A warranty is a stipulation collateral to the main purpose of the contract, the
breach of which give rise to a claim for damages but not a right to reject the
goods and treat the contract as repudiated.
• The conditions and warranties implied in a contract of sale of goods bind the
contracting parties, the buyer and the seller.
• The parties to a contract of sale may exclude the implied terms by the express
agreement or by previous dealings or by usage.
• In a contract of sale of goods, there are implied conditions as regards to title,
description, sample, fitness for particular purpose and merchantable quality.
• Unless the circumstances of the contract indicate a different intention, there is
an implied condition on the part of the seller that in the case of a sale, he has
a right to sell the goods, and in the case of an agreement to sell, he will have a
right to sell the goods at the time when the property or ownership is to pass.
• There is an implied warranty that the buyer shall have and enjoy quiet
possession of the goods and that the goods shall be free from any charge or
encumbrance in favour of any third party not declared or known to the buyer
before or at the time when the contact is made.
• The risk passes when the property in the goods passes, thus the goods will
remain at the sellerÊs risk until the property in the goods is transferred to the
buyer.

Sale of goods Fitness for purpose

Agreement to sell Merchantable quality
Implied terms Sample
Title Property in goods
Description Transfer of title
Text Books:
• Wu M. A. & Vohrah B. (2000). The Commercial Law of Malaysia (2nd Ed.).
Cases:
• Baldry v. Marshall [1925] 1 KB 260.
• Beale v. Taylor [1967] 1 WLR 1193.
• Cammell Laird & Co v. Manganese Bronz and Brass Co Ltd [1934] AC 402.
• Drummond v. Van Ingen (1887) 12 App. Cas. 284.
• Griffiths v. Peter Conway Ltd. [1939] 1 All ER 685.
• Moore & Co v. Landauer & Co [1921] 2 KB 519.
• Nagurdas Purshotumdas & Co. v Mitsui Bussan Kaisha Ltd (1911) 12 SSLR
67.
• Rowland v Divall [1923] 2 KB 500.
• Thornett & Fehr v. Beers & Sons [1913] 1 KB 486.
• Wilson v. Ricket, Cockerall & Co. Ltd [1954] 1 All ER 868.

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

TOPIC 13 LAW OF SALE OF GOODS (PART II) W 217
13.1 TRANSFER OF TITLE BY SELLER WHO IS

NOT THE OWNER AND ITS EXCEPTIONS
For the purpose of transfer of title in the contract of sale of goods, Section 27
provides the rule that no one can transfer a better title than he has himself. The
maxim is nemo dat quod non habet. This means the buyer can only acquire a
good title in the goods if he purchases from the owner of the goods.
Consequently, if the buyer purchases the goods from a person who is not the
owner of the goods or a person who does not sell the goods under the ownerÊs
authority, the buyer will not acquire a title in the goods he purchases. The
wordings of Section 27 are as follows:
• ÂSubject 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 than the seller had....‰
This rule protects the right of ownership. The right of the original owner is
preserved and the suit for the tort of conversion can be taken against the
unauthorised seller and the innocent purchaser.
In the case of Lim Chui Lai v. Zeno Ltd [1964] 30 MLJ 314, Zeno Ltd entered
into an agreement with a contractor named Ahmad who had secured
contracts from the Petaling Jaya Authority for construction of culverts.
Under the contract, Zeno Ltd was to provide Ahmad with all the materials
for the culverts construction. They brought the materials for the projects and
delivered them to the construction site. Later, AhmadÊs contracts with
Petaling Jaya Authority were cancelled whereupon Zeno Ltd informed the
authority that the materials on the site belonged to them. When they
attempted to sell the materials, they discovered that the materials had been
sold by Ahmad to Lim Chui Lai, the appellant in this action.
In an action for conversion, the Federal Court held that: Ahmad was merely
the bailee and not the owner of the goods at the time he sold them to the
appellant. Since Ahmad had no title to the goods or authority to sell them, he
therefore could not transfer any title to the appellant.
However, there are few exceptions to the rule of nemo dat quod non habet (Refer to
Figure 13.1. The exceptions are provided in the following provisions under the
Sale of Goods Act 1957.

218 X TOPIC 13 LAW OF SALE OF GOODS (PART II)
Figure 13.1: Exceptions to the rule of nemo dat quad non habet
13.1.1 Estoppel
The provision for estoppel can be found under Section 27 of the Sale of Goods
Act 1957 which states: „.....unless the owner of the goods is by his conduct
precluded from denying the sellerÊs authority to sell‰. This means if the owner of
the goods through his conduct makes the buyer believes that the person who
sells the goods has the authority to sell, then the buyer will acquire a good title of
the goods.

The following case illustrates the estoppel principle.
N.Z. Securities & Finance Ltd v. Wrightcars Ltd [1925] 1 NZLR 77.
A agreed to sell a car to B. B tendered a cheque as the payment and was

given possession of the car. The parties agreed that the ownership of the
car was not to pass until A received the price. Later, B sold the car to C.
Before the sale to C was finalised, C contacted AÊs office and C was
informed by AÊs employee that B had paid for the car. However, the
cheque given to A by B was dishonoured and A repossessed the car. C
then sued A for conversion and was successful in claiming that A was
precluded by his conduct from denying BÊs authority to sell. The title had
passed to C.
13.1.2 Sale by a Merchantile Agent

An agent under the agency contract may pass a good title when selling his
principalÊs goods provided he is acting within his actual or usual (apparent)
authority. A merchantile agent is an agent having in the customary course of
business authority either to sell goods, or to consign goods for the purpose of
sale, or to buy goods, or to raise money on the security of goods. A broker, an
auctioneer or a dealer of goods for commission are the examples of merchantile
agents. The relevant provision is found in the Proviso to Section 27 of the Sale of
Goods Act 1957:
„Provided that where a merchantile agent is, 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 merchantile 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.‰
It is important that the merchantile agent must be in possession of the goods or

the documents of title to goods at the time of disposition and the possession must
be with the consent of the owner. Also the disposition must be made when acting
in the ordinary course of business of a merchantile agent and the buyer must not
have notice of the agentÊs lack of authority to sell.

13.1.3 Sale by One of Joint Owners

The provision for this exception is found in Section 28 of the Sale of Goods Act
1957. According to Section 28,
„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 in good faith and has no notice at the time of the contract
that the seller has no authority to sell.‰
For example, Sheila and Tracey are joint-owners of one refrigerator which they
bought a year ago. Sheila has just moved out from the house that they both rent
from the landlord, Mr. Justin. Sheila agreed at the time when she moved out that
the refrigerator is to be kept and used by Tracey who will still occupy the house.
Later, Tracey sold the refrigerator to a friend of her (Dewi) who bought it in good
faith and did not know that the refrigerator jointly owned by Tracey and Sheila.
The ownership of the refrigerator is transferred to Dewi.
13.1.4 Sale under a Voidable Contract

Sale by a person in possession of goods under a voidable contract is provided in
Section 29 of the Sale of Goods Act 1957. It provides that,
„where the seller of goods has obtained possession under a contract voidable
under Section 19 or Section 20 of the Contracts Act 1950, but the contract has not
been rescinded at the time of the sale, the buyer acquires a good title to the goods
provided he buys them in good faith and without notice of the seller's defect of
title.‰
Where the seller of goods has obtained possession under a voidable contract, but
the contract has not been avoided at the time of the sale, the buyer acquires a
good title to the goods provided he buys them in good faith and without notice
of the sellerÊs defect of title. This provision applies to contracts which are
voidable, when the consent of the original owner is caused by corcion, fraud,
misrepresentation or undue influence. The seller must have sold the goods to the
buyer before the original owner rescinded the voidable contract.
13.1.5 Sale by a Seller in Possession After Sale

The exception is provided in Section 30(1) of the Sale of Goods Act 1957. „Where
a person, having sold goods, continues or is in possession of the goods or of the
documents of title to the goods, the delivery or transfer by that person or by a
mercantile agent acting for him, of the goods or documents of title under any
sale, pledge or other disposition thereof to any person receiving the same in good
faith and without notice of the previous sale shall have the same effect as if the
person making the delivery or transfer were expressly authorised by the owner
of the goods to make the same.‰
Under this exception, a seller who remains in possession of the goods or of the
documents of title for the goods which he had sold, can pass a good title to a
bona fide purchaser. Thus, the second buyer gets a good title while the original
buyer loses his.
13.1.6 Sale by a Buyer in Possession after Sale

The exception is provided in Section 30(2) of the Sale of Goods Act 1957,
„Where a person, having bought or agreed to buy goods, obtains, with the
consent of the seller, possession of the goods or the documents of title to the
goods, the delivery or transfer by that person or by a mercantile agent acting for
him of the goods or documents of title under any sale, pledge, or other
disposition thereof to any person receiving the same in good faith and without
notice of any lien or other right of the original seller in respect of the goods shall
have effect as if such lien or right did not exist.‰
This means if a buyer having bought or agreed to buy goods, obtains possession
of the goods or the documents of title with the consent of the seller, he can pass a
good title to a subsequent bona fide purchaser.
In the case of Newtons of Wembley Ltd v. Williams [1965] 1 QB 560, the

plaintiffs sold a car to A who paid by cheque. Although he was given
possession of the car, it was agreed that the property would not pass until the
cheque was honoured. The cheque was dishonoured and the plaintiffs
rescinded the contract but A had sold the car to B who bought it without
knowledge of the fact. B then resold the car to the defendant. The plaintiffs
attempted to recover the car from the defendant.
The Court of Appeal held that: A, the original buyer was in possession with
consent of the plaintiffs. Hence, he could pass a good title to B who then
transferred it to the defendant.

13.2 PERFORMANCE OF CONTRACT

Chapter IV of the Sale of Goods Act 1957 deals with the performance of contract
of sale of goods that covers the rules relating to:
• delivery of goods;
• place of delivery;
• time of delivery;
• wrong quantity or mix of goods delivered;
• delivery by instalments, delivery to carrier or wharfingers; and
• acceptance of the goods.
Duties of seller and buyer (Section 31)

It is the duty of the seller to deliver the goods and of the buyer to accept and pay
for them in accordance with the terms of the contract of sale.
Payment and delivery are concurrent conditions (Section 32)

Unless otherwise agreed, delivery of the goods and payment of the price are
concurrent conditions, that is to say, the seller shall be ready and willing to give
possession of the goods to the buyer in exchange for the price, and the buyer
shall be ready and willing to pay the price in exchange for possession of the
goods.
Delivery (Section 33)

Delivery of goods sold may be made by doing anything which the parties agree
shall be treated as delivery or which has the effect of putting the goods in the
possession of the buyer or of any person authorised to hold them on his behalf.
Buyer to apply for delivery (Section 35)

Apart from any express contract, the seller of goods is not bound to deliver them
until the buyer applies for delivery.
Rules as to delivery (Section 36)

(a) Whether it is for the buyer to take possession of the goods or for the seller
to send them to the buyer is a question depending in each case on the
contract, express or implied, between the parties. Apart from any such
contract, goods sold are to be delivered at the place at which they are at the
time of the sale, and goods agreed to be sold are to be delivered at the place
at which they are at the time of the agreement to sell, or, if not then in
existence, at the place at which they are manufactured or produced.

(b) Where under the contract of sale the seller is bound to send the goods to the
buyer, but no time for sending them is fixed, the seller is bound to send
them within a reasonable time.
(c) Where the goods at the time of sale are in the possession of a third person,
there is no delivery by seller to buyer unless and until such third person
acknowledges to the buyer that he holds the goods on his behalf:
(d) Provided that nothing in this section shall affect the operation of the issue
or transfer of any document of title to goods.
(e) Demand or tender of delivery may be treated as ineffectual unless made at

a reasonable hour. What is a reasonable hour is a question of fact.
(f) Unless otherwise agreed, the expenses of and incidental to putting the
goods into a deliverable state shall be borne by the seller.
Delivery of wrong quantity (Section 37)

(a) Where the seller delivers to the buyer a quantity of goods less than he
contracted to sell, the buyer may reject them, but if the buyer accepts the
goods so delivered, he shall pay for them at the contract rate.
(b) Where the seller delivers to the buyer a quantity of goods larger than he
contracted to sell, the buyer may accept the goods included in the contract
and reject the rest, or he may reject the whole. If the buyer accepts the
whole of the goods so delivered, he shall pay for them at the contract rate.
(c) Where the seller delivers to the buyer the goods he contracted to sell mixed
with goods of a different description not included in the contract, the buyer
may accept the goods which are in accordance with the contract and reject
the rest, or may reject the whole.
(d) This section is subject to any usage of trade, special agreement or course of
dealing between the parties.
Instalment deliveries (Section 38)

(a) Unless otherwise agreed the buyer of goods is not bound to accept delivery
thereof by instalments.
(b) Where there is a contract for the sale of goods to be delivered by stated
instalments which are to be separately paid for, and the seller makes no
delivery or defective delivery in respect of one or more instalments, or the
buyer neglects or refuses to take delivery of or pay for one or more

instalments, it is a question in each case depending on the terms of the

contract and the circumstances of the case, whether the breach of contract is
a repudiation of the whole contract, or whether it is a severable breach
giving rise to a claim for compensation but not to a right to treat the whole
contract as repudiated.
Delivery to carrier or wharfingers (Section 39)

(a) Where in pursuance of a contract of sale, the seller is authorised or required
to send the goods to the buyer, delivery of the goods to a carrier, whether
named by the buyer or not, for the purpose of transmission to the buyer, or
delivery of the goods to wharfinger for safe custody, is prima facie deemed
to be a delivery of the goods to the buyer.
(b) Unless otherwise authorised by the buyer, the seller shall make such
contract with the carrier or wharfinger on behalf of the buyer as may be
reasonable having regard to the nature of the goods and the other
circumstances of the case. If the seller omits so to do, and the goods are lost
or damaged in course of transit or whilst in the custody of the wharfinger,
the buyer may decline to treat the delivery to the carrier or wharfinger as a
delivery to himself, or may hold the seller responsible in damages.
(c) Unless otherwise agreed, where goods are sent by the seller to the buyer by
a route involving sea transit, in circumstances in which it is usual to insure,
the seller shall give such notice to the buyer as may enable him to insure
them during sea transit, and if the seller fails to do so, the goods shall be
deemed to be at his risk during such sea transit.
Buyer's right of examining the goods (Section 41)

(a) Where goods are delivered to the buyer which he has not previously
examined, he is not deemed to have accepted them unless and until he has
had a reasonable opportunity of examining them for the purpose of
ascertaining whether they are in conformity with the contract.
(b) Unless otherwise agreed, when the seller tenders delivery of goods to the
buyer, he is bound, on request, to afford the buyer a reasonable opportunity
of examining the goods for the purpose of ascertaining whether they are in
conformity with the contract.
Acceptance (Section 42)

The buyer is deemed to have accepted the goods when he intimates to the seller
that he has accepted them, or when the goods have been delivered to him and he
does any act in relation to them which is inconsistent with the ownership of the

seller, or when, after the lapse of a reasonable time, he retains the goods without
intimating to the seller that he has rejected them.
13.3 REMEDIES FOR BREACH
13.3.1 Breach by the Buyer

Breach of contract of sale of goods by the buyer includes the buyerÊs failure to
take delivery, to accept goods and to pay for the goods.
Liability of buyer for neglecting or refusing delivery of goods (Section 44)
When the seller is ready and willing to deliver the goods and requests the buyer
to take delivery, and the buyer does not, within a reasonable time after such
request, take delivery of the goods, he is liable to the seller for any loss
occasioned by his neglect or refusal to take delivery, and also for a reasonable
charge for the care and custody of the goods:
Provided that nothing in this section shall affect the rights of the seller where the
neglect or refusal of the buyer to take delivery amounts to a repudiation of the
contract.
Suit for price (Section 55)

(a) Where under a contract of sale the property in the goods has passed to the
buyer and the buyer wrongfully neglects or refuses to pay for the goods
according to the terms of the contract, the seller may sue him for the price
of the goods.
(b) Where under a contract of sale the price is payable on a day certain
irrespective of delivery and the buyer wrongfully neglects or refuses to pay
such price, the seller may sue him for the price although the property in the
goods has not passed and the goods have not been appropriated to the
contract.
Damages for non-acceptance (Section 56)

Where the buyer wrongfully neglects or refuses to accept and pay for the goods
the seller may sue him for damages for non-acceptance.

13.3.2 Rights of Unpaid Seller against the Goods

(Seller’s Remedies)
The Sale of Goods Act 1957 provides remedies to the seller who can sue the
buyer for the price of the goods or damages for non-acceptance of the goods. A
seller of goods is deemed to be an unpaid seller within the meaning of the Act
and the rights of the unpaid seller are detailed out in the following provisions of
the Act, as follows:
Unpaid seller defined (Section 45)
(a) The seller of goods is deemed to be an "unpaid seller" within the meaning
of this Act:
(i) when the whole of the price has not been paid or tendered;
(ii) when a bill of exchange or other negotiable instrument has been
received as conditional payment, and the condition on which it was
received has not been fulfilled by reason of the dishonour of the
instrument or otherwise.
(b) In this Topic, the term "seller" includes any person who is in the position of
a seller, as, for instance, an agent of the seller to whom the bill of lading has
been indorsed, or a consignor or agent who has himself paid, or is directly
responsible for, the price.
Unpaid seller's rights (Section 46)
(a) Subject to this Act and of any law for the time being in force,
notwithstanding that the property in the goods may have passed to the
buyer, the unpaid seller of goods, as such, has, by implication of law:
(i) a lien on the goods for the price while he is in possession of them;
(ii) in case of the insolvency of the buyer a right of stopping the goods in
transit after he has parted with the possession of them;
(iii) a right of resale as limited by this Act.
(b) Where the property in goods has not passed to the buyer, the unpaid seller
has, in addition to his other remedies, a right of withholding delivery
similar to and co-extensive with his rights of lien and stoppage in transit
where the property has passed to the buyer.

I. LIEN
Seller's lien (Section 47)
(a) Subject to this Act, the unpaid seller of goods who is in possession of them
is entitled to retain possession of them until payment or tender of the price
in the following cases, namely:
(i) where the goods have been sold without any stipulation as to credit;
(ii) where the goods have been sold on credit, but the term of credit has
expired;
(iii) where the buyer becomes insolvent.
(b) The seller may exercise his right of lien notwithstanding that he is in
possession of the goods as agent or bailee for the buyer.
Part delivery (Section 48)
Where an unpaid seller has made part delivery of the goods, he may exercise his
right of lien on the remainder, unless such part delivery has been made under
such circumstances as to show an agreement to waive the lien.
Termination of lien (Section 49)
(a) The unpaid seller of goods loses his lien thereon:
(i) when he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the
goods;
(ii) when the buyer or his agent lawfully obtains possession of the goods;
(iii) by waiver thereof.
(b) The unpaid seller of goods, having a lien thereon, does not lose his lien by
the only reason that he has obtained a decree for the price of the goods.
II. STOPPAGE IN TRANSIT
Right of stoppage in transit (Section 50)
Subject to this Act when the buyer of goods becomes insolvent the unpaid seller
who has parted with the possession of the goods has the right of stopping them
in transit, that is to say, he may resume possession of the goods as long as they

are in the course of transit, and may retain them until payment or tender of the
price.
Duration of transit (Section 51)
(a) Goods are deemed to be in course of transit from the time when they are
delivered to a carrier or other bailee for the purpose of transmission to the
buyer, until the buyer or his agent in that behalf takes delivery of them
from such carrier or other bailee.
(b) If the buyer or his agent in that behalf obtains delivery of the goods before
their arrival at the appointed destination, the transit is at an end.
(c) If after the arrival of the goods at the appointed destination, the carrier or
other bailee acknowledges to the buyer or his agent that he holds the goods
on his behalf and continues in possession of them as bailee for the buyer or
his agent, the transit is at an end and it is immaterial that a further
destination for the goods may have been indicated by the buyer.
(d) If the goods are rejected by the buyer and the carrier or other bailee
continues in possession of them, the transit is not deemed to be at an end,
even if the seller has refused to receive them back.
(e) When the goods are delivered to a ship chartered by the buyer, it is a
question depending on the circumstances of the particular case, whether
they are in the possession of the master as a carrier or as agent of the buyer.
(f) Where the carrier or other bailee wrongfully refuses to deliver the goods to
the buyer or his agent in that behalf, the transit is deemed to be at an end.
(g) Where part delivery of the goods has been made to the buyer or his agent in
that behalf, the remainder of the goods may be stopped in transit, unless
such part delivery has been given in such circumstances as to show an
agreement to give up possession of the whole of the goods.
How stoppage in transit is effected (Section 52)
(a) The unpaid seller may exercise his right of stoppage in transit either by
taking actual possession of the goods, or by giving notice of his claim to the
carrier or other bailee in whose possession the goods are. Such notice may
be given either to the person in actual possession of the goods or to his
principal. In the latter case the notice, to be effectual, shall be given at such
time and in such circumstances that the principal, by the exercise of

reasonable diligence, may communicate it to his servant or agent in time to

prevent a delivery to the buyer.
(b) When notice of stoppage in transit is given by the seller to the carrier or
other bailee in possession of the goods, he shall redeliver the goods to or
according to the directions of the seller. The expenses of such redelivery
shall be borne by the seller.
Effect of sub-sale or pledge by buyer (Section 53)
(a) Subject to this Act, the unpaid seller's right of lien or stoppage in transit is
not affected by any sale or other disposition of the goods which the buyer
may have made unless the seller has assented thereto:
(b) Provided that where a document of title to goods has been issued or
lawfully transferred to any person as buyer or owner of the goods and that
person transfers the document to a person who takes the document in good
faith and for consideration, then, if such last-mentioned transfer was by
way of sale, the unpaid seller's right of lien or stoppage in transit is
defeated, and, if such last-mentioned transfer was by way of pledge or
other disposition for value, the unpaid seller's right of lien or stoppage in
transit can only be exercised subject to the rights of the transferee.
(c) Where the transfer is by way of pledge, the unpaid seller may require the
pledgee to have the amount secured by the pledge satisfied in the first
instance, as far as possible, out of any other goods or securities of the buyer
in the hands of the pledgee and available against the buyer.
III. RESALE
Sale not generally rescinded by lien or stoppage in transit (Section 54)
(a) Subject to this section, a contract of sale is not rescinded by the mere
exercise by an unpaid seller of his right of lien or stoppage in transit.
(b) Where the goods are of a perishable nature, or where the unpaid seller who
has exercised his right of lien or stoppage in transit gives notice to the buyer
of his intention to resell, the unpaid seller may, if the buyer does not within
a reasonable time pay or tender the price, resell the goods within a
reasonable time and recover from the original buyer damages for any loss
occasioned by his breach of contract; but the buyer shall not be entitled to
any profit which may occur on the resale. If such notice is not given, the

unpaid seller shall not be entitled to recover such damages and the buyer
shall be entitled to the profit, if any, on the resale.
(c) Where an unpaid seller who has exercised his right of lien or stoppage in
transit resells the goods, the buyer acquires a good title thereto as against
the original buyer, notwithstanding that no notice of the resale has been
given to the original buyer.
(d) Where the seller expressly reserves a right of resale in case the buyer should
make default and, on the buyer making default, resells the goods, the
original contract of sale is thereby rescinded, but without prejudice to any
claim which the seller may have for damages.
13.3.3 Breach by the Seller and the Buyer’s Remedies

The Sale of Goods Act 1957 provides certain remedies to the buyer when the
seller breaches the contract of sale of goods, as follows:
Damages for non-delivery (Section 57)

Where the seller wrongfully neglects or refuses to deliver the goods to the buyer,
the buyer may sue the seller for damages for non-delivery.
Specific performance (Section 58)

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

(b) The fact that a buyer has set up a breach of warranty in diminution of the
price does not prevent him suing for the same breach of warranty if he has
suffered further damage.
SELF-CHECK 13.1
(a) What is the meaning of the maxim nemo dat quod non habet?
(b) Can a seller other than the owner transfer an ownership in the
goods to a purchaser?
(c) What is the effect of a transfer of property in the goods by a
seller who is not the owner?
(d) Are there any exceptions to the rule of nemo dat quod non
habet?
(e) Can a buyer acquire a good title to the goods from a seller
under a voidable contract?
(f) What is meant by a bona fide purchaser?
(g) What are the rights of an unpaid seller under the statute?
(h) What are the remedies available to the buyer when the seller
breaches the contract of sale of goods?

ACTIVITY 13.1
(a) Che Wan has just started her food catering business and served
some common Malaysian specialties. She entered into a contract
with Cik Jah, a seller specialising in the supply of coconut milk
and fresh vegetables. Under the contract, Cik Jah agreed to
supply Che Wan (on daily basis) with 40 kg of coconut milk, 15
kg of cucumbers and 10 kg of vegetables. Che Wan had agreed to
this arrangement after being shown the samples of the items by
an agent of Cik Jah. On the sixth day of his business, 30 kg of
coconut milk, 10 kg of cucumbers and 8 kg of vegetables were
delivered in bad condition and could not be used. Later the same
day, the remaining 10 kg of coconut milk, 5 kg of cucumbers and
2 kg of vegetables were completely destroyed when the van used
to deliver them skidded into a river. Che Wan refused to pay for
all the items to Cik Jah. Advise Che Wan and Cik Jah on their
legal rights under the contract of sale of goods.
(b) Last August, Rafique sold a car that he possessed as a joint-owner
with his wife (Sarah) to Samuel at the price of RM30,000. The sale
was made without the knowledge of Sarah, which disappointed her
very much. Sarah wished to obtain the car and went to see Samuel
for such purpose. However, Samuel refused to allow Sarah to take
the car for the reason that the payment for the car had been given to
Rafique and he had no knowledge about Sarah not consented to the
sale. Advise Samuel on his right to retain the car.

• Nemo dat quod non habet means no one can transfer a better title than he has
himself.
• Purchaser can only acquire a good title in the goods if he purchases from the
owner of the goods.
• Purchaser will acquire a good title of the goods if the owner of the goods
makes the buyer believe that the person who sells the goods has the authority
to sell.
• A merchantile agent is an agent having in the customary course of business
authority either to sell goods, or to consign goods for the purpose of sale, or
to buy goods, or to raise money on the security of goods.
• If a seller of goods obtained possession under a voidable contract, the buyer
acquires a good title to the goods provided he buys them in good faith and
without notice of the sellerÊs defect of title.
• A seller who remains in possession of the goods or of the documents of title
of the goods can pass a good title to a bona fide purchaser.
• A buyer who obtains possession of the goods or the documents of title with
the consent of the seller can pass a good title to a subsequent bona fide
purchaser.
• The performance of contract of sale of goods covers the rules relating to
delivery of goods, place and time of delivery and quantity of goods
delivered.
• Breach of contract of sale of goods by the buyer includes the buyerÊs failure to
take delivery, to accept goods and to pay for the goods.
• Remedies available to the seller include a suit against the buyer for the price
of the goods or damages for non-acceptance of the goods.
Performance Nemo dat quod non habet

Unpaid seller Estoppel
Lien Delivery
Stoppage in transit Payment
Resale Remedies

Text Books:
Cases:
• Lim Chui Lai v. Zeno Ltd [1964] 30 MLJ 314.
• Newtons of Wembley Ltd v. Williams [1965] 1 QB 560.
• N.Z. Securities & Finance Ltd v. Wrightcars Ltd [1925] 1 NZLR 77.

Topic X Law of Hire-
14 Purchase
LEARNING OUTCOMES
1. Define the meaning of hire-purchase;
2. Describe the formation and nature of hire-purchase agreement;
X
3. Describe the parties involve in hire-purchase;
X4. Understand the important terms in hire-purchase agreement;

5. Identify the rights and liabilities of owner and hirer; and
6. Explain the procedure for repossession of goods under hire-purchase
agreement.
X INTRODUCTION
Hire-purchase is part of the consumer credit. Consumer credits in Malaysia are
governed by various statutes depending on the types of goods involved. For
instance Moneylenders Act 1957, Pawn Brokers Act 1974, Banking and Financial
Institutions Act 1989, Islamic Banking Act 1983, Insurance Act 1963, Takaful Act
1963 and Cooperative Societies Act 1948. Hire-purchase is basically a purchase
through credit in which the hirer purchases by way of instalment. The owner (for
instance a finance institution) will hire the goods to the hirer (purchaser) and the
hirer has an option to return the goods and terminate the contract or to buy the
goods upon completion of the agreed period. In Malaysia, the hire-purchase
transaction is governed by the Hire-Purchase Act 1967. The Hire-Purchase Act
provides for standard form of agreement for hire-purchase, regulates the rights
and liabilities of the owner and hirer and procedures for repossession of the
goods.

236 X TOPIK 14 LAW OF HIRE- PURCHASE
14.1 DEFINITION OF HIRE-PURCHASE

In Section 2(1) of the Hire-Purchase Act 1967, hire-purchase is defined as,
„a letting of goods with an option to purchase and an agreement for the purchase
of goods by instalments (whether the agreement describes the instalments as rent
or hire or otherwise), but does not include any agreement:
(a) whereby the property in the goods comprised therein passes at the time of
the agreement or upon or at any time before delivery of the goods; or
(b) under which the person by whom the goods are being hired or purchased is
a person who is engaged in the trade or business of selling goods of the
same nature or description as the goods comprised in the agreement.‰
The above provision explains that hire-purchase is:

(a) Letting of goods with an option to purchase, and
(b) An agreement for the purchase of goods by instalments.
In hire-purchase, property in the goods does not pass at the time of the
agreement, before delivery of the goods or at the time of delivery. In hire-
purchase agreement, there would be a seller or dealer who offers the goods for
sale to a purchaser. However this seller does not offer payment by instalment to
the purchaser. Thus, the seller will sell the goods to a finance company which
will subsequently hire the goods to the purchaser under the hire-purchase terms.
Therefore there would be an original sale between a seller and and a finance
company and a hire-purchase agreement between a purchaser and a finance
company.

TOPIK 14 LAW OF HIRE- PURCHASE W 237
14.2 MEANING OF GOODS UNDER THE HIRE

PURCHASE ACT 1967
The First Schedule of the Hire-Purchase Act 1967 lists down several types of
goods that come within the meaning of goods under the Act, as follows:
(a) All consumer goods.

(b) Motor vehicles including, invalid carriages, motor cycles, motor cars
including taxi cabs and hire cars, goods vehicles (the maximum permissible
laden weight does not exceed 2540 kilograms), buses including stage buses.
Can a purchaser purchase the goods according to the hire-purchase agreement

under the Act even though the said goods do not fall within the above schedule?
The answer is affirmative provided that both the owner and the hirer agreed to
be bound by the Hire-Purchase Act 1967. On the other hand if they do not agree,
the hire-purchase agreement shall be governed by the common law principles.
This is due to the fact that the purchase of any other goods which do not fall
within the ambit of the First Schedule is controlled by the common law
principles. Under common law, the hire-purchase transaction is a form of
contract in which the owner releases the goods to the buyer for hire-purchase
with the option given to the buyer whether he wants to return the goods and
terminate the contract or opt to purchase upon completion of payment of the said
goods.

In the case of Tractors Malaysia Bhd v Kumpulan Pembinaan Malaysia

Sdn.Bhd. [1979] 1 MLJ 129, the appellant and the respondent had entered into
an agreement to purchase a tractor. According to the agreement, the appellant
agreed to hire the said tractor to the respondent subject to terms and
conditions of the agreement and the Hire-Purchase Act 1967. The respondent
had paid the deposit but it had defaulted in making instalment payments.
Consequently, the appellant took possession of the tractor. The respondent
then paid all the instalments due and other incidental costs, but the
respondent had again defaulted in making payments. The appellant claimed
for the balance of the amount the respondent had to pay including costs and
damages.
The respondent paid all the amount claimed by the appellant and the
ownership of the tractor had been transferred to the respondentÊs name. The
respondent contended that the agreement between the respondent and the
appellant was not a hire-purchase but an ordinary sale of goods. Therefore,
the appellantÊs action in taking possession of the tractor when the respondent
defaulted in making instalment payments was against the law.
The Court held that: On a proper construction of the agreement, it was clearly
the intention of the parties that the property in the tractor was not to pass until
full payment is made. Thus it was not a sale on instalment terms but more in
the nature of a hire-purchase. The appellant therefore had the right to
repossess the tractor on breach of the terms of the agreement by the
respondent.
14.3 FORMATION OF THE HIRE-PURCHASE

AGREEMENT
The formation of a hire-purchase agreement (Refer to Figure 14.1) shall cover
three different stages, as follows:
(a) Pre-contractual obligations;
(b) Construction of a hire-purchase agreement;
(c) Post-contractual obligations

Figure 14.1: Formation of hire-purcased content
14.3.1 Pre-contractual Obligations

Section 4(1) of the Hire-Purchase Act 1967 requires an owner to give a
prospective hirer a written statement in accordance with the form set out in the
Second Schedule. In case of a dealer, the schedule requires information on the
description of goods and a summary of the financial obligations of the
prospective hirer. Under Section 4(3), he is not obliged to enter into a transaction
and therefore is not bound to make any payment for the preparation or service of
such statement. According to section 4(4), failure to observe the obligations shall
render the hire-purchase agreement void.
14.3.2 Construction of a Hire-Purchase Agreement

Section 4A(1) of the Hire-Purchase Act 1967 clearly states that any hire-purchase
agreement must be in writing. Hence, failure to observe this requirement would
render the agreement void and the owner will be guilty of an offence.
Section 4B(1) of the Hire-Purchase Act 1967 requires a hire-purchase agreement

to be signed by or on behalf of all parties to the agreement. It is important that
the hirer must not sign a blank form as the requirement under Section 4B(1), „No

owner, dealer, agent or person acting on behalf of the owner shall require or
cause any intending hirer or his agent to sign a hire-Purchase agreement or any
other form or document relating to a hire-purchase agreement unless such hire-
purchase agreement, form or document has been duly completed.‰ According to
Section 4B(3) of the Hire-Purchase Act 1967, failure to comply with the above
requirements shall render the agreement void.
Section 4C(1)(c) of the Hire-Purchase Act 1967 further provides the following
informations to be included in the hire-purchase agreement and failure to
comply with it will render the agreement void:
(a) Date of the commencement of hiring;
(b) Number of instalments to be paid by the hirer;
(c) Amount of each instalment;
(d) Time for payment for each instalment;
(e) Description of the goods; and
(f) Address where the goods are kept.
According to section 4C(1)(b), if any part of the consideration is in the form of

other than cash money, the description of such consideration shall be stated in
the agreement.
Besides that, the hire-purchase agreement must include a table with the
following particulars:
(a) Cash price of the goods;
(b) Amount of deposit paid in cash and other type of consideration given
(other than cash);
(c) Delivery cost;
(d) Payment for vehicle (if any);
(e) Insurance;
(f) Total amount in (a) to (e) above, less the deposit;
(g) Term charges;
(h) Annual percentage rate for term charges;
(i) Total amount in (f) and (g), (the balance originally payable under the
agreement); and
(j) Total amount payable.

If there are more than one goods, Section 4D(1) of the Hire-purchase Act 1967
requires a separate hire-purchase agreement to be prepared for every item.
Failure to observe the requirement will render the agreement void under Section
4D(2).
14.3.3 Post-Contractual Obligations

Section 5(1) of the Hire-Purchase Act 1967 requires a copy of the hire-purchase
agreement to be sent to the hirer and guarantors (if any) within fourteen days
after it is made. Otherwise according to Section 5(1A), such agreement will be
unenforceable by the owner. As required under Section 5(3), if any part of the
total amount payable consists of an amount paid or to be paid under a policy of
insurance, the owner must serve on the hirer a copy of the insurance payment
receipt. The owner must also serve a copy of the policy within seven days of its
receipt.
SELF-CHECK 14.1
(a) What is the meaning of hire-purchase?

(b) How is a hire purchase agreement different from an ordinary
contract of sale of goods?
(c) How do you describe the relationship between all parties
involved in the hire purchase agreement?
(d) What is the importance of hire purchase as one of the
consumer credits in Malaysia?
(e) What are the types of goods that fall within the First
Schedule of the Hire Purchase Act 1967?
(f) What are the important requirements for the formation of a
hire Purchase agreement?
14.4 RIGHTS AND PROTECTIONS OF HIRERS

Once a hire-purchase agreement has been concluded in accordance with the
requirements of the Hire-Purchase Act 1967, a hirer shall enjoy rights and
protections that are available under the statute. Those rights and protections
derived from the implied conditions and warranties as to the goods hired. This is
provided in Section 7 of the Hire-Purchase Act 1967. In general, the implied

conditions and warranties are similar to the implied conditions and warranties
contain in Section 14, 15 and 16 of the Sale of Goods Act 1957.
14.4.1 Implied Conditions

Under the Hire-Purchase Act 1967, the followings are the implied conditions to
be observed in a hire-purchase agreement:
(a) The owner has the right to sell the goods at the time when the property is to
pass (Section 7(1)(b)).
(b) The goods sold to the hirer must be of merchantable quality (Section 7(2)).
There is no definition of merchantable quality under the Hire-Purchase Act
1967 but it means the same as Section 16 of the Sale of Goods Act 1957.
However, the condition of merchantable quality shall not be implied under

the following situations:
(i) Where the hirer has examined the goods or a sample and the
examination ought to have revealed the defects;
(ii) If the goods are used items (second-hand goods) and the agreement
contains a statement that the goods are second-hand and all
conditions and warranties as to quality are expressly negated; and
(iii) The owner proves that the hirer has acknowledged in writing that the
statement was brought to his notice.
(c) The goods must be fit for the hirerÊs purpose (Section 7(3)). The implied
condition as to fitness shall not apply to second-hand goods and where
exclusion of the implied conditions and warranties as to fitness is expressly
spelt out in the agreement.
14.4.2 Implied Warranties

The implied warranties to be observed in a hire-purchase agreement are as
follows:
(a) The hirer must enjoy quiet possession of the goods (Section 7(1)(a)). Similar
to Section 14(b) of the Sale of Goods Act 1957, quiet possession includes
interference by the seller and interference arising from lawful acts of third
parties.

(b) The goods are free from any charge or encumbrance created by the owner
in favour of any third party (Section 7(1)(c)).
14.5 LIABILITY OF OWNER AND DEALER FOR

MISREPRESENTATION
Apart from the above rights and protections, a hirer is also entitled to claim
against the owner or any person making misrepresentation in the negotiations
leading to the hire-purchase agreement. This is provided in Section 8 of the Hire-
purchase Act 1967. This right of hirer cannot be excluded or limited by any
contractual term. The remedies which the hirer may claim are the right to sue for
damages against the dealer or its agent, and against the owner, the right to
rescind the hire-purchase agreement. The owner is however entitled to be
indemnified by the agent or dealer responsible for a misrepresentation.
14.6 STATUTORY RIGHTS OF THE HIRER

Section 9 to 15 of the Hire-Purchase Act 1967 laid down statutory rights of a hirer
under the hire-purchase agreement. The rights are summarised in the table 9.1
below:
Table 9.1: Summary of statuary rights of hirer
Section 9 Right to a copy of statement of financial position
A hirer has a right to request (in writing) the owner to supply him
(within fourteen days) a statement containing the following:
(a) the amount paid to the owner by the hirer;
(b) the amount due to the owner;
(c) the amount payable under the hire-purchase agreement; and
(d) the amount derived from interest on overdue instalments.
The request must be made in writing and the statement must be

supplied by the owner to the hirer within fourteen days after the request
is received. Failure of the owner to comply with the provision without
reasonable cause will deny the ownerÊs right to enforce the followings:
(a) The agreement against the hirer;
(b) Any right to recover the goods from the hirer;
(c) Any contract of guarantee relating to the agreement.

Section 10 Right to appropriation of payment when more that one agreement
A hirer has a right to appropriate payments when he has more than one
agreement, and the payment is insufficient to discharge the total amount
due. In such circumstance, a hirer has a right to instruct payment to a
particular agreement or make payment to any two or more agreements
in such proportion as he thinks fit. If there is no instruction by the hirer,
payment is to be appropriated to satisfy the payment due.
Section 11 Right to apply for an order to remove goods
A hirer is obliged to keep the goods in a place mentioned in the

agreement. However a hirer, may seek a permission to move the goods
to another location by applying to a Magistrate for an order to remove
the goods to the new place.
Section 12 Right to assign hirerÊs rights under the agreement
A hirer may assign his rights, title and interest under a hire-purchase
agreement with the consent of an owner, or without his consent, if it is
unreasonably withheld. However, prior to that the owner may require that:
(a) All defaults under the agreement be made good; and
(b) The hirer and the assignee to execute and deliver an assignment
whereby the assignee is personally liable to:
i Pay the balance of the instalments;
ii Observe all conditions of the hire-purchase agreement; and
iii Pay reasonable costs incurred by the owner in stamping or
registering the assignment agreement.
Section 13 Passing of right by operation of law
Upon the death of a hirer, all his right, title and interest under the hire-
purchase agreement shall pass to his personal representative who shall
comply with the agreement.
Section 14 Right to early completion of agreement
A hirer has a right to make early settlement of the full purchase price
under the hire-purchase agreement provided that the hirer:
(a) Gives a written notice to the owner of his intention; and
(b) Pays the owner the Ânet balanceÊ due under the agreement.
The Ânet balanceÊ due refers to the balance payable under the agreement less:
i the total amount already paid;
ii the statutory rebate for term charges; and
iii the statutory rebate for insurance (if any).

Section 15 Right to terminate the agreement
If the hirer cannot afford to proceed with the instalment payment, he

may terminate the hire-purchase agreement by returning the goods to
the owner:
(a) at the ownerÊs usual place of business; or
(b) at any other place specified for that purpose in the agreement; or
(c) at a place mutually agreed by the parties; or
(d) (d)at a place fixed by the court (upon application by the hirer to the
Magistrate).
Upon termination of the agreement, the hirer may:

(a) Introduce a buyer who will pay in cash at a price agreeable to the
owner; or
(b) Recover part of his payments where the value of the goods is more
than the balance outstanding under the agreement; or
(c) Must pay the owner the difference in sum, if the value of the goods
is less than the balance outstanding under the agreement.
14.7 REPOSSESSION OF GOODS BY THE

OWNER
According to Section 16 of the Hire-Purchase Act 1967, the owner has the right to
repossess the goods from the hirer under the following events:
(a) When the hirer has defaulted in making payments for two consecutive
months; or
(b) When the hirer has defaulted in making the last payment.
The Act lays down certain procedures that require mandatory compliance.
Failure to observe such procedures gives the right to the hirer to challenge the
validity of the repossession by the owner.
14.7.1 Procedures Prior to Repossession

Even though the owner has the right to repossess the goods upon occurrence of
any of the above situations, the owner has to comply with certain procedures as
clearly provided by the Hire-Purchase Act 1967, as follows:

(a) Service of Fourth Schedule notice (Section 16(1)).

Before the owner proceeds with the repossession, the owner must serve a
Fourth Schedule notice to the hirer. The notice period must not be less than
twenty one days after the service of the said notice. If the hirer fails to act
within the period, the owner will have the right to repossess. Section 43 of
the Hire-Purchase Act 1967 stipulates that the service may be done by way
of personal service or registered post to the last written address or by
substituted service.
Exception to the requirement of Fourth Schedule notice.

According to Section 16(2) of the Hire-Purchase Act 1967, the service of the
Fourth Schedule notice is not necessary if the owner has reasonable ground
to believe that the hirer will conceal or remove the goods to another place
unknown to the owner.
In the case of death of the hirer, under Section 16(1A), the owner can
repossess the goods after there have been four consecutive defaults of
payment.
In Public Prosecutor v Mohamed Nor (1988), the accused was a hirer

under the hire-purchase agreement with the Finance Company of
KUBB. The hirer defaulted in making monthly instalment and the
KUBB had assigned its agent to repossess the car from the hirer without
issuing any 4th Schedule Notice to him. The agent introduced himself
to the hirer and informed the hirer of his intention but the agent had
been forced to leave the house of the hirer. At that time the hirer was
holding a piece of sword and another piece of weapon in his hands.
Held: The act of KUBB to repossess the car without giving any 4th
Schedule Notice was considered as invalid procedure under section
16(1) of the Hire-Purchase Act 1967.

In United Manufacturers Sdn. Bhd. v Sulaiman bin Ahmad &Anor [1989]

1 MLJ 482, the hirer contended that the 4th Schedule Notice under section
16(1) has ceased to have effect. This was due to the repossession that has
been effected only after 2 years after the service of notice to the hirer.
Held: The Hire -Purchase Act 1967 did not specify any time limit within
which an owner must repossess goods after the service of the notice.
(b) Notice under Rule 3 of the Hire-Purchase (Recovery of Possession and

Maintenance of Records by Owners) Regulation 1976.
In Pang Brothers Motors Sdn Bhd v Lee Aik Seng [1978] 1 MLJ 179, the
appellant repossessed the car purchased by the respondent through hire-
purchase. The notice of repossession has been served two days less of the
required notice period under section 16(1) of the Hire-Purchase Act 1967.
The court held that: The notice which was served less than twenty one
days before repossession was invalid.
After fourteen days of the service of the Fourth Schedule notice, a notice
under Rule 3 of the Regulation shall be served on the hirer. This notice is
intended to inform the intention of the owner to take possession of the
goods. Failure to issue this notice is an offence under Rule 9 of the
Regulation.
(c) Compliance or non-compliance of the hirer to the notice (Section 16A).

If the hirer returns the goods or voluntarily surrender the goods within
twenty one days of the Fourth Schedule notice, the hirer shall not be liable
for the cost of repossession, cost incidental to repossession and cost of
storage.
14.7.2 Procedures during Repossession

There are certain procedures that the owner must comply whenever approaching
the hirer for repossession, as follows:

(a) Personal service of a document acknowledging receipt of the goods (Section

16(4)).
After the goods had been repossessed by the owner, he must prepare a
short description of the goods and the date, time and place where the
repossession of the goods had taken place.
(b) Rule 4 of the Hire-Purchase (Recovery of Possession and Maintenance of

Records by Owners) Regulation 1976.
Rule 4 lays down the following procedures to be observed by the owner:
(i) If the repossession is being carried out by the owner personally, he

must produce and show his identity card and provide the name and
address of the company, firm, body or organisation to which he
belongs, to the hirer, his servant or agent or occupant or person who
is in possession of the goods; or
(ii) If the repossession is being carried out by the ownerÊs agent or

servant, such an agent or servant must likewise produce and show his
identity card and also his authority card to the hirer, his servant or
agent or person who is in possession of the goods.
14.7.3 Procedures after Repossession (Rights of the

Hirer after Repossession)
The followings are the rights of the hirer after repossession ( Refer to Figure 14.2):
(a) The service of Fifth Schedule notice (Section 16(3)).

Within twenty one days after repossession, the owner is required to serve
the Fifth Schedule notice on the hirer and every guarantor (if any). The
purpose of this notice is to inform the hirer of his rights after repossession.
(b) Recovery of goods by the hirer (Section 18(1)(a)(i)).

Within twenty one days of the service of the Fifth Schedule notice, the hirer
may give a written notice to the owner to request the owner to redeliver the
goods that have been repossessed. The goods may be redelivered to the
hirer upon payment of the amount due by the hirer to the owner or when
the hirer had remedied any breach of the agreement or had paid the owner
the costs and expenses incurred by the owner in remedying the breach.

(c) Restriction of selling or disposal of goods on the owner (Section 17).

Without the consent of the hirer, the owner cannot sell or dispose the goods
until the expiration of the twenty one days notice in the Fifth Schedule.
(d) Introduction of cash buyer (Section 18(1)(a)(ii)).

The hirer can require the owner to sell the goods to a cash buyer introduced
by the hirer by giving a written notice to the owner.
(e) Recovery of part of hirerÊs payment (Section18(b)).

The hirer has the right to recover the difference in sum where the value of
the goods repossessed exceeds the money owed.
(f) Notice of auction (Section 18(4)(a)).

A notice must be given to the hirer if the owner intends to sell the goods
repossessed through public auction.
(g) Option to purchase (Section 18(4)(b)).

The hirer shall be given an option to purchase where the owner intends to
sell the goods repossessed otherwise than by public auction, at a price less
than the ownerÊs estimated value.
Notice Under rule 3

4th Schedule notice (from owner to hirer)
(from owner to hirer)
Section 16(4)
Rule 4 of Hire Purchase
(14 days)
repossessing item
Owner can begin
(owner)
Before Reposession
Rights of hirers after
(21 days) repossession
Item is repossessed by owner
(refer to item 14.6.3)

Compliance or Non-compliance of Hirer During Reposession
(Section 16 A)
After repossession
Figure 14.2: Timeline for the normal procedure of repossession by owner.
14.8 INSURANCE
According to Section 26(1) of the Hire-Purchase Act 1967, the owner has to take
the insurance cover in the name of the hirer for the goods under the hire-
purchase agreement. For motor vehicles, the obligation of the owner to take

insurance cover is for the first year of the agreement. For the following years, the
hirer is under the duty to insure (Section 26(2)). For other goods, the cover is
taken out throughout the duration of the goods remain under hire-purchase. For
renewal of motor vehicle insurance, a hirer must inform the owner that he has
renewed the policy not less than fourteen days before its expiry (Section 26(5)). If
the hirer fails to renew the policy, the owner may proceed to insure the motor
vehicle and the hirer must bear the cost (Section 26(6)).
SELF-CHECK 14.2
(a) What are the implied terms contained in a hire-purchase

agreement?
(b) Under what situation is a condition of merchantable quality not
implied in hire-purchase?
(c) What are the rights of a hirer against a dealer or an owner who
makes a misrepresentation?
(d) What are the statutory rights of a hirer under the hire-purchase
agreement?
(e) What are the situations that give the right to the owner to
repossess goods under hire-purchase?
(f) Can the owner repossess goods from the hirer without giving
notice? Why?
(g) Is the service of notice of repossession under the Fourth and
Fifth Schedule mandatory?
(h) What are the rights of a hirer after repossession?
(i) What is the effect of non-compliance of the repossession
procedures laid down under the Hire-Purchase Act 1967?

ACTIVITY 14.1
(a) Explain the procedures for the repossession of goods under a hire
purchase agreement as provided in the Hire-Purchase Act 1967.
(b) Ashraf has just started working with a new company after his
employment was terminated from the previous company for
reason of retrenchment. Three months before he was terminated,
he bought a car from Citra Merdeka Cycle & Carriage and for the
purpose of financing, Ashraf obtained a loan from Jimat Kira
Finance Berhad. Ashraf had no problem of paying the instalment
of the car until the end of February 2007, when he was
retrenched. Due to his financial difficulty, Ashraf has defaulted
in making two monthly instalments of the car. As a result of the
default in payment, without any notice, JJ was sent by Jimat Kira
Finance to AshrafÊs house to repossess his car. Ashraf in
upholding his right showed JJ his ÂparangÊ and said, „Get out or
youÊll die‰. Discuss whether Ashraf has the right to evict JJ.
(c) Zakri, a clerk was terminated from his company 2 months ago.
Since then, Zakri had no other financial means and was unable to
pay the monthly instalments for his Myvi car. One day, while
Zakri was driving his car, three men stopped him. They claimed
that they were instructed by ZakriÊs financier to repossess the car
on his failure to pay the monthly instalments due. Zakri was
shocked and immediately surrendered the key of the car to the
three men. The three men told Zakri that if he wanted to claim
for his car, he had to settle the instalment arrears to the financier.
Zakri managed to borrow money from his friend for the
settlement of the arrears. Unfortunately, he was informed by the
financier that his car had already been sold to Ali. Discuss the
legality of the repossession and the sale of the car to Ali.

• The hire-purchase transaction in Malaysia is governed by the Hire-Purchase

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

Text Books:
Cases:
• Pang Brothers Motors Sdn Bhd, v Lee Aik Seng [1978] 1 MLJ 179
• Public Prosecutor v Mohamed Nor [1988] 3 MLJ 119
• Tractors Malaysia Bhd v Kumpulan Pembinaan Malaysia Sdn.Bhd. [1979] 1
MLJ 129
• United Manufacturers Sdn. Bhd. v Sulaiman bin Ahmad & Anor [1989

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Copyright © Open University Malaysia (OUM)

Module Writer: Dr Rozanah Abdul Rahman

Moderator: Dr Azlinor Sufian

Developed by: Centre for Instructional Design and Technology

Printed by: Meteor Doc. Sdn. Bhd.

First Printing, April 2009

Version March 2011

Copyright © Open University Malaysia (OUM)

Topic 1 Law of Contract (Proposal and Acceptance) 1

Topic 2 Law of Contract (Consideration) 20

Topic 3 Law of Contract (Intention to Create Legal Relations) 35

Copyright © Open University Malaysia (OUM)

Topic 4 Law of Contract (Capacity to Contract) 47

Topic 5 Law of Contract (Free Consent to Contract) 58

Topic 6 Law of Contract (Void and Illegal Contract) 82

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Topic 7 Law of Contract (Discharge of Contract And Remedies) 97

Topic 8 Law of Agency (Part 1) 122

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Topic 9 Law of Agency (Part II) 136

Topic 10 Law of Partnership (Part I) 158

Topic 11 Law of Partnership (Part II) 181

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Topic 12 Law of Sale of Goods (Part I) 198

Topic 13 Law of Sale of Goods (Part II) 216

Topic 14 Law of Hire-Purchase 235

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14.4.2 Implied Warranties 242

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Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

What will you get from doing this course? xii

How will you be assessed? xix

What support will you get in studying this course? xix

How should you study for this course? xx

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WELCOME TO BMLW5103 BUSINESS LAW

WHAT WILL YOU GET FROM DOING THIS COURSE?

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Aim of the Course

Course Learning Outcomes

HOW CAN YOU GET THE MOST FROM THIS COURSE?

Please ensure that you have all these materials.

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Figure 1: Overview of the Course

Copyright © Open University Malaysia (OUM)

Topic 1: Introduces the law which governs the formation of contracts in

Topic 2: Discusses the importance of consideration in a contract, without

Topic 3: Discusses the requirement of intention in order to create legal

Topic 5: Discusses the importance of free consent by the parties to a

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by any act of coercion, undue influence, fraud, misrepresentation,

Topic 6: Discusses the circumstances under which contracts may become

Topic 7: Discusses the various ways in which contracts will be discharged

Topic 8: Discusses the meaning of agency, the purpose of agency contract,

Topic 10: Discusses the important characteristics of partnership, the rules on

Topic 14: Discusses the formation and nature of hire-purchase agreement,

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Organisation of Course Content

Questions are interspersed at strategic points in the chapter to

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Copyright © Open University Malaysia (OUM)