LAW OF CONTRACT

Formation of Contract

Learning Outcome

 By the end of this students will be able to explain the different types of contract.
 By end of this topic students will be able to explain the basic requirements of a valid contract.
 By end of this topic will be able decide if there is a valid contract in a given situation.

Law of contract in Malaysia is based on English law and the Indian Law. Contracts in Malaysia is
governed by the Malaysian Contract Act and English common law. A contract can be defined as a legally
binding agreement between two or more persons. The Contract Act defines Contract as “an agreement
enforceable by law “this is provided in Section 2(h) of the Contract Act 1950.

Basic Elements of a Contract:

One of the biggest misconception people have about a legally binding contract is the fact that it has to
be in writing. It is important to take in most of countries that falls under common law legal tradition
unless it is specifically required under the law, it not true that contracts have to be in writing for it to be
legally binding.

For example in Malaysia, only certain contracts like the contract of hire purchase or contract of transfer
of immoveable property has to be in writing. Other than that there is no requirement that the contracts
have to be in writing. Even a verbal contract can be legally binding if the following requirements are
satisfied.

The requirements are:

 There must be an offer.

 Acceptance.
 Consideration.
 Intention to create legal relationship.
 Legal Capacity
 Certainly
 Free Consent
Now we will consider these requirements in more detail.

A offer to B if B would be interested in buying his car for 20.000. Now B agrees to buy but only pays 1000
first. After one week they are supposed to meet and B would hand over the 19.000. Now after two days
someone else offers to buy the car for 30.000. A goes ahead and sells the car to C. Can B sue A.

OFFER

An offer can be defined as an expression of willingness to enter into a contract as soon as it is accepted.
It is defined in the Malaysian Contract Act as “when one person signifies to another his willingness to do
or to abstain from doing anything, with a view to obtaining the assent of that other to act or abstinence,
he is said to make a proposal” 2(a).

It is important to take note that although under the English Law the offer is used the Contract Act does
not use the term offers it uses the term proposal. Most of the reference books are also using the same
term. An offer can be made to an individual or to the whole world. An offer can be bilateral or unilateral.

Characteristics of Bilateral offer:

- It is normally one to one.

- It is normally a promise for a promise.

Characteristics of Unilateral offer:

- It is between one person and the whole world.

- The offer is a promise the acceptance is normally performance of
act.

Another important term that need to be discussed is the term called invitation to treat. What is an
invitation to treat? Invitation to treat is actually an invitation to make an offer. It is important to know
the difference between and offer and an invitation to treat because only an acceptance of an offer will
lead to a legally binding contract.

Examples:

Offer : A asked B, would you like to buy my watch for RM200?

Invitation to treat: A tells B, I think it’s time for me to sell off my watch.
Examples of Invitation to treat recognized by the Courts.

 Display of goods in shop windows – Generally display of goods in shop windows are considered
to be invitation to treat. That is why a shop assistance can refuse sell good to you even if you are
willing to pay for the price displayed.

- Fisher v Bell.

- Phamaceutical Society of Great Britain v Boots Cash

Chemist LTD.
 Auction - It is important to know the following points about auctions,
when an auctioneer calls for a bit it is considered an invitation to treat. When a bit is made it is
considered an offer, contract is concluded on the fall of the hammer.
-Payne v Cave
 Advertisement - Whether an advertisement is an offer or an invitation to
treat will depend on the type of transaction it leads to. If the advertisement leads to bilateral
transaction then it will be considered an Invitation to treat. Relevant case – Granger and Sons v
Gough. If the advertisement leads to Unillateral transaction then it will be considered an offer.
Relevant case will be Carlill v Carbolic Smoke Ball Co Ltd.
 Tender - Inviting people or companies to submit tender is
considered an invitation to treat. When the tender proposal is submitted it becomes an offer. It
is entirely up the company to decide which offer they would like to accept.
- Case Spencer v Harding

Other Important points about offer that need to be considered and taken into account:

Communication of an offer:

Once an offer is made, for it to be recognized as valid it must communicated to the person to whom the
offer is made.

 Communication here means it must be brought to the attention of the other party. Relevant
case will be the case of R v Taylor.
Termination of an offer:

Once an offer is made it will remain open until it is brought to an end. An offer can be brought to end in
the following ways:

 Revocation – This is the most important way that requires discussion. This refers to a situation
where after an offer is made the person who made the offer changes his mind and decides to
take back the offer. The question is this, is this allowed under the laws. Both the Contract Act
and the case laws seem to suggest that it is possible. According to the case of Payne v Cave an
offer can revoked any time before it is accepted.

-For a revocation to be valid the law very clear provides that it must be communicated. If it is
not communicated the revocation will not be valid. Relevant case will be the case of Byrne v Van
Tienoven.

-Dickinson v Dodd says that the communication can be made by a third party.

 Expiry of time period – If there is a time period mentioned the offer will be open until the end of
the time period.

-It is important to take note that even if there is a time period mentioned the offer can still be
revoked before the time period ends as long as the offer is not accepted.

-If there are consideration provided then the offer cannot be revoked until the time period ends.

-What if there is no time period mentioned, does that mean the offer will be open forever? The
answer is no. According to decided cases it will be open for reasonable time. The courts will
decide on what is the reasonable amount based on the facts of each case. Ramsgate Victoria
Hotel v Montyfiore.

 Acceptance of an offer, an offer will come to an end as soon as it accepted.

 Performance of act as required under the contract.

ACCEPTANCE

For there to be a valid contract once and offer has been made, it must be accepted. The acceptance
must be legally valid as recognized by the Act and the cases. Section 2(b), Contract Act provides that
when the person to whom the proposal is made signifies his assent thereto, the proposal is said to have
been accepted.

It is important to take note that Section 7 clearly provides that acceptance must be final and
unconditional. This brings us to another issue of Counter Offer. When an offer is made by A to B, instead
of accepting it if B were to try and bargain for better price for example, that is known as counter offer
and it will not be recognized as an acceptance. This was established in the case of Tim V Hoffman.
The next issue to consider, if the counter offer is rejected can the person accept the original offer? The
answer is no, because once the counter offer is made, it will cancel the original offer. This was explained
in the case of Hyde v Wrench. Stevenson v Mclean mere seeking of further information is not counter
offer.

Section 7(b) of the contract act provides that acceptance must be expressed in some usual and
reasonable way manner, unless the proposer had specifically mentioned the way it should be
accepted .This also bring another issue into questions. Can silent amount to an acceptance? The answer
is no, this was established in the case of Felthouse v Bentley. Communication of Acceptance, for an offer
to be valid it must be communicated. Communication here means it must be brought to the attention of
the parties. Brogdan v Metropolitan Railway.

Although as a general rule for an acceptance to be valid it must be communicated there are view
exception under the law that allows for an acceptance to be recognized even though it was never really
brought to the attention of the parties. Following are some of exception:

 Postal rule – The Postal rule was established in the case of Adam v Lindsell. In Malaysia it is
provided in the Malaysian Contract Act Paragraph (a) Section 4(2).It provides that the
communication of an acceptance is complete 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.
 A -------- B 2/09/2020
 B ---------- 4/9
 A ------------5/9 Revoking offer- Postal rule only applies acceptance.
 B --------- A 6/9 P/R -Contract concluded- Contract confirmed. English Law.
 B 7/9 Revocation
 A ----------- 8/9 G/R –Contract concluded.
-As to the acceptor, however, paragraph (b) of Section 4(2) of the same Act provides that the
communication of an acceptance is complete as against the acceptor when it comes to the
knowledge of the proposer.
 Where acceptance is by way of performance of an act. If the acceptance is by way of
performance of an act then in most cases there is no need for the communication of
Acceptance.

 If the proposer himself were to waive the right to be informed.

As a conclusion it can be said that once there exist a valid offer and that offer is accepted there will be
an agreement. It is important to take note this does not amount to a binding contract. In order for a
binding contract to come into existence further requirement need to be satisfied.
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