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OUTCOME 1: PRINCIPLES OF LAW

Test your understanding.


Analyse the following transactions in terms of offer and acceptance Filling a job vacancy Parking a car in a multi-storey car park Taking a bus ride Buying a cup of coffee from an automatic vending machine Buying a packet of soap powder from a supermarket Buying an antique dresser at an auction Acquiring shares in a privatisation issue Buying a book via internet

THE LAW OF CONTRACT


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WHAT IS CONTRACT?
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Think about the agreements you have made over the past week:
buying a newspaper; taking the bus into work or college; agreeing to complete an assignment by a; particular date; getting a cup of coffee at breaktime; arranging to meet a friend for lunch Can all these transactions be classed as contracts?

Introduction
Definition of Contract: An agreement made between two or more parties, which the law will enforce. S. 2(h) of CA 1950 - it is an agreement enforceable by law. A contract is different from all other forms of agreement because the parties to a contract acquire as a result of the agreement certain rights and obligations 6 which are legally enforceable.

If a party breaks his promise and persists with his refusal to act as agreed, the other party may well wish to enforce performance. Generally, the law will only compel a person to carry out his promise if that promise is embodied in a valid contract. If a valid contract exists then a party to the contract can sue the other for failure to carry it out.
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Types of Contracts
Bilateral vs. Unilateral Executory Valid vs. Unenforceable Express vs. Executed vs. Voidable vs. Void vs. Implied

Bilateral and Unilateral Contracts


Bilateral: both parties make a promise. Unilateral: one party makes a promise that the other party can accept only by doing something.

Types of Contracts
Express and Implied Contracts

(contd)

Express: the two parties explicitly state all important terms of their agreement. Implied: the words and conduct indicate that the parties intended an agreement.

Executory and Executed Contracts


Executory: when one or more parties has not fulfilled its obligations. Executed: when all parties have fulfilled their obligations.

Types of Contracts

(contd)

Valid, Unenforceable, Voidable, and Void Agreements


Valid: satisfies the laws requirements. Unenforceable: when the parties intend to form a valid bargain but some rule of law prevents enforcement. Voidable: when the law permits one party to terminate the agreement. Void: one that neither party can enforce, usually because the purpose is illegal or one of the parties had no legal authority.

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Essentials for a valid contract Proposal/Offer Acceptance Intention to create legal obligation Consideration Certainty Legal capacity Free consent Legality of the objects Required formalities

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PROPOSAL
S.2(a) of the Contract Act 1950 provides that: When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to the act or abstinence, he is said to make a proposal. Example: Mr. Squidward wrote offering to sell his car to Mr. Crab for RM50,000.
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The person making the proposal is called the promisor/proposer/offeror. The party accepting the proposal is referred to as the promisee. Based on the above example, Mr. Crab acceptance of Mr. Squidwards proposal to buy the car establishes an agreement.

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A proposal can be made to an individual, a class of persons, a firm, a company or to the public at large.

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Carlill v Carbolic Smoke Ball Co. (1893) IQB 256

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Carlill v Carbolic Smoke Ball Co. (1893) IQB 256, is a good illustration of an offer made to the public. The defendant issued an advertisement in which they offered to pay 100 to any person who succumbed to influenza after having used one of their smoke balls in a specified period. The plaintiff Mrs. Carlill bought and used the smokes ball as prescribed and caught influenza.
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She sued the company for the promised reward. The defendants contended that the contract was made with the entire world, that is with everybody, and that one cant contract with everybody. It was held that an offer could be made to the entire world because the contract will only be made with that limited portion of that public who came forward and performed the condition on the faith of the advertisement.

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A proposal can be made in any form; it can be made in writing, orally, by conduct or by combination of these. The communication of the proposal is complete when it comes to the knowledge of the person to whom it is made.

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Invitation to Treat
Invitation to treat is not a proposal but a sort of preliminary communication which passes between the parties at the stage of negotiation. Examples of invitation to treat: 1) The display of goods with a price ticket attached in a shop window or on a supermarket. This is not an offer to sell but an invitation for customers to make an offer to buy.
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FISHER v BELL [1960]


Shopkeeper- flick knife on display in his shop windowcharged with offering weapon contrary to the provisions of the Restriction of Offensive Weapon Act 1959. Held: the display of goods with a price ticket attached in a shop window is an ITT ( not an offer to sell)

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PHARMACEUTICAL SOCIETY OF GREAT BRITAIN v BOOTS CASH CHEMISTS Ltd [1953]

Defendant charged under Pharmacy and Poisons Act 1933-unlawful to sell certain poisons unless such sale was supervised by a registered pharmacist. Held: the display was only and ITT (Payment was to be made at the exit where a cashier was stationed and in every case involving drugs, a pharmacist supervised the transaction and authorized to prevent a sale.) 21

2) Advertisements, catalogues and brochures. PARTRIDGE v CRITTENDEN [1968] Advertisement-Bramblefinch cocks, Bramblefinch hen, 25s each. Held: the advertisement was an ITT ( the word offer did not appear in the advertisement.) However, there are some situations where an advertisement may be regarded as a definite offer: Carlills case
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3) Auctions PAYNE v CAVE [1789] -Df made the highest bid (offer) at an auction sale but withdrew his bid before the fall of the auctioneers hammer (acceptance). -Df was not bound to purchase the goods.
HARRIS v NICKERSON [1873] -Advertisement a forthcoming auction sale does not amount to an offer to hold it. 4) Tender 5) Company prospectus

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5) Statements of price in negotiations for the sale of land.

HARVEY v FARCEY [1893] H sent telegram to F: Will u sell us Bumper Hall Pen? Telegraph lowest cash price H telegraphed his response: We agree to buy BHP for 900 asked by u. Held: there was no contract
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COMMUNICATION OF OFFER
Rule: Only an addressee may accept the proposal A party accepting a proposal must be aware of its existence. A party who casually returns a lost property to its owner cannot legally claim a reward if he is unaware of it at the time but subsequently discovers the existence of an offer of rewards for its return.
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R v CLARKE [1927]
The Western Australian Gov. offered a reward for information leading to the arrest and conviction of persons responsible for the murder of two police officers. Held: The claimed failed on the grounds that the information was given to clear himself and not in reliance on the offer of rewards.
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S.2 (b) CA provides that when a person to whom the proposal is made signifies his assert thereto, the proposal is said to be accepted, a proposal when accepted becomes a promise. S.9 CA provides that, where the acceptance is made in words, the acceptance is expressed, where the acceptance is made other than in words, it is implied.

2. ACCEPTANCE

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S.7(a) CA provides that, acceptance must be absolute and unqualified. The acceptance must be made on exactly the same terms as proposed without modifications or variations. Any modifications or variations of the proposal does not constitute an acceptance but amounts to a counter-offer. It is treated as a rejection of the offer.
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In the case of Hyde v Wrench (1840): June 6-defendant offered to sell his estate to the Plaintiff for 1,000. June 8plaintiff replied stating he was willing to buy at 950, defendant refused to sell. June 27 plaintiff wrote again offering to pay 1,000 as there was no contract formed. By making the counter offer the plaintiff had rejected the original offer on June 8, and is no longer able to accept it later.
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However, a distinction needs to be drawn between a counter-offer and a request for further information. STEVENSON JAQUES & CO v MCLEAN [1880] HELD: there is no counter-offer but a mere inquiry which should have been answered and not treated as a rejection of the offer.

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Acceptance-Subject to Contract it often happen that acceptance may be qualified by such common term as subject to contract or subject to a formal contract being drawn up by our solicitors. Under such circumstances the court is inclined to determine that there is no binding agreement until the contract as stipulated LOW KAR YIT v MOHD ISA [1963]
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COMMUNICATION OF ACCEPTANCE
S.7 (b) CA: 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.
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Silence, absence of response or just total disregard of the proposal is not acceptance as there is no positive act that can be related to the proposal. The proposer may not throw the burden on the addressee to a positive act of rejection by saying for instance: if I do not hear from U within a week, I shall assume that U have accepted my proposal.

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FRASER v EVERETT [1889]


Held: there was no rule of law saying that silence gives consent applicable to mercantile contracts.

FELTHOUSE v BINDLEY [1862]


If I hear no more about him, I shall consider the horse is mine at 30.
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ACCEPTANCE THROUGH POST


General Rule: acceptance is effective or complete only when it is communicated to the proposer. ( comes to the actual knowledge of the proposer) Exception: S.4(2) CA, where the parties have contemplated the used of the post as means of communication :
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The communication of an acceptance is complete: a) As against the proposer, when it is put in a course of transmission 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.

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Illustration (b) of s.4


B accepts As proposal by a letter sent by post. The communication of the acceptance is complete: As against A, when the letter is posted; As against B, when the letter is received by A
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CASE LAW 1. 2. 3. ADAMS v LINDSELL [1818] HOUSEHOLD FIRE INSURANCE CO v GRANT (1879) ENTORES LTD v MILES FAR EAST CORPORATION [1955]

4.
5.

IGNATIUS v BELL (1913)


BRINKIBON v STAHAG STAHL UND STAHLWARENHANDELSGESELLSCHAFT [1983]

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ADAMS v LINDSELL
2 Sept- Df wrote to the claimants-offering to sell them some wool and asking for an answer in course of post. The letter was wrongly addressed & reached the claimant on 5 Sept. 5 Sept-the claimants posted a letter of acceptance-reached the Df on 9 Sept. 8 Sept-the Df sold the wool to someone else Held: There was a contract between the Df and the claimants.

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HOUSEHOLD FIRE INSURANCE CO v GRANT (1879)


Grant applied for shares in the claimant company. A letter of allotment was posted but Grant never received it. When the company went into liquidation, Grant was asked as a shareholder, to contribute the amount still outstanding on the shares he held. Held: Grant was a shareholder of the company. The contract to buy shares was formed when the letter of allotment ( acceptance) was posted.

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ENTORES LTD v MILES FAR EAST CORPORATION [1955]


Denning LJ stated as follows: when a contract is made by post it is clear law throughout the common law countries that acceptance is complete as soon as the letter is put into the post box, and that is the place where the contract is made.

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IGNATIUS v BELL (1913)


In the case, the parties had contemplated the use of the post as a means of communication. The plaintiff sent a notice of acceptance by registered post in Klang on August 16, 1912 but it was not delivered till the evening of August 25 because the Plaintiff was away. The letter had remained in the post office at Kuala Selangor until picked up by the Defendant. Held: the option was duly exercised by the Pf when the letter was posted on August 16

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BRINKIBON v STAHAG STAHL UND STAHLWARENHANDELSGESELLSCHAFT [1983]

The House of Lords affirmed the rule with Respect to communications by telex established in the Entores case. According to the court no universal rule can cover all such cases and they must be resolved by reference to the intentions of the parties, by sound business practice and in some instances, by a judgement where the risks should lie.
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Notes: 1. Where there is a delay in the post or the letter of acceptance is misplaced by the postal authority, the proposer is bound irrespective of his knowledge of the acceptance, while on the other hand, the acceptor remains free till actual receipt by the proposer. This implies that in the meantime, the acceptor may also withdraw his acceptance.
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2. Therefore, a proposer should stipulate in a proposal that acceptance is complete only upon receipt. That would exclude the postal rule by express terms of the proposal. 3. The postal rule also applies to telegram sent through the post office but not to more instantaneous methods of communication such as telex and telephone.
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TERMINATION OF PROPOSAL
S.5(1) CA:
A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

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S. 6 states that a proposal is revoked:


a. b. c. d. By notice of revocation By the lapse of time By the failure of acceptor to fulfil a condition precedent By the death or mental disorder of the party

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REJECTION
1. 2. An offer is rejected if: The offeree notifies the offeror to that he does not wish to accept the offer; The offer attempts to accept subject to certain conditions; The offeree makes a counter-offer.

3.

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HYDE v WRENCH
Wrench-offered to sell his farm to Hyde for 1,000. Hyde replied with a counter-offer of 950 which was refused. Then Hyde was prepared to meet the original of offer of 1,000. Held: No contract had been formed

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Illustration- S. 5
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

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BYRNE v TIENHOVEN [1880]


The Df offered to sell 1,000 boxes of tinplates to the Pf. The following communication took place: 1 Oct: Df posted letter of offer in Cardiff to the Pf in New York. 8 Oct: Df posted a letter revoking the offer of Oct 1. 11 Oct: Pf received the letter of offer posted on Oct 1 and sent acceptance by telegram the same day. It also followed up with letter of acceptance on 15 Oct. 20 Oct: Dfs letter of revocation received by the Pf.
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The court ruled that : There was a contract between the parties because the revocation of the offer posted on 8 October was not effective till 20 October when it was received by the Pf but in the meantime, the latter had already accepted the offer on 11 October when the telegram was sent.
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REVOCATION OF ACCEPTANCE

S.5(2) states: An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Illustration to S.5: on Revocation of acceptance made by post: A proposes by a letter sent by post to sell his house to B B accepts the proposal by a letter sent by post B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.

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Section 26 of CA provides that: An agreement made without consideration is void Section 2(d) of CA defines consideration as when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstain from doing, or promises to do or to abstain from doing something such an act or abstinence or promise is called a consideration for the promise.

CONSIDERATION

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Consideration may be viewed as a sort of bargain, a quid pro quo or the price which one party pays to buy the promise or act of the other. When a promisor promises to do or abstain from doing something, the promisee must pay a price for it. This price to be paid may be an act or an abstinence or a promise to perform a future act or abstinence.

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Example: X has lost his camera while travelling on a train and he offers a reward of $50 to anyone who finds and returns it to him. Y finds and returns it to him. In this simple illustration, X promises to pay RM50 to anyone in return for an act i.e. finding the camera and returning it. Y pays the price for Xs promise by performing the act which, by section 2(d) is the consideration for the promise.

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TYPES OF CONSIDERATION
EXECUTORY CONSIDERATION when one promise is made in return for another. ( a promise in return for a promise) eg: X agrees to sell Y a motorcycle and Y promises to pay RM 2000 for it. Illustration (a) of S.24: A agrees to sell his house to B for RM10,000. Here, Bs promise to pay the sum of RM10,000 is the consideration for As promise to sell the house, and As promise to sell the house is the consideration for Bs promise to pay RM10,000. These are lawful consideration.

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EXECUTED CONSIDERATION

When a promise is made in return for the performance of an act. For example: X offers RM100 to anyone who finds and returns his camera which he has earlier lost. Y finds and returns the camera in response to the offer. Ys consideration for Xs promise is executed, and only Xs liability remains outstanding.
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PAST CONSIDERATION

Where a promise is made subsequent to and in return for an act that has already been performed. So, if Y finds and returns Xs camera and in gratitute, X promises to reward him with RM100, the promise is made in return for a prior act. Illustration (c) of S.26: A finds Bs purse and gives him. B promise to give A RM 50. This is a contract.

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Past Consideration:

Past consideration may be good consideration. Section 2(d) provides that if the act done were at the desire of the promisor, then such an act would constitute consideration. The phrase has done or abstained from doing implies that even if the act done was prior to the promise, such an act would constitute consideration as long as it was done at the desire of the promisor.
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Kepong Prospecting Ltd v A.E Schmidt & Marjorie Schmidt [1968]


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 subsequent formation of the company, Kepong Prospecting Ltd, and was appointed Managing Director. After the company was formed, an agreement was entered into between them under which the company undertook to pay him one percent of the value of all ore sold from the mining land. Held: It did constitute a valid consideration so that Schmidt was entitled to his claim on the amount.

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Under English Law, the general rule is that past consideration is insufficient to support a contract. Re McArdle [1951] Held: a promise pay 488 to the wife was made after the improvement had been completed and was therefore, not binding. However, if a person is asked to perform a service, which he duly carries out, and later a promise to pay is made, the promise will be binding.

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A person who promises to carry out a duty which he is already obliged to perform is in reality offering nothing of value. However, if a person does more than he is bound to do, there may be sufficient consideration

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Consideration needs not be adequate. For example, illustration (f) to section 26 states: A agrees to sell a horse worth RM1,000 for RM10. The agreement is a contract notwithstanding the inadequacy of the consideration.

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Under Common Law, consideration must move from the promisee. Under Local law, a party to an agreement can enforce the promise, even if he himself has given no consideration, so long as somebody else has done so. A,B and C are parties to an agreement in which C promises to pay A RM1000 if B will repair Cs house. B repairs Cs house and C does not pay A anything. Although A has not given any consideration for Cs promise, he may sue C on the promise because consideration has moved from B.

CASE: Venkata Chinnaya v Verikatara maya (1881)

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INTENTION TO CREATE LEGAL RELATION


A valid contract requires an intention to create legal relations. The court determines where there is such an intention from the language used and the context in which it is used. There are 2 presumptions have developed in the determination of intention with respect to agreements:
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In business agreement, there is an agreement that the parties intend legal consequences to follow unless the parties specify otherwise. In social domestic or family agreement, it is implied as a matter of course that no legal relations are contemplated, but such presumption may be rebuttable.

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