TOPIC 2

LAW OF CONTRACT
PART 1
FORMATION OF CONTRACT
 TOPIC 2
LAW OF CONTRACT
PART 1 FORMATION OF CONTRACT
PART 2 VOIDABLE CONTRACT
PART 3 DISCHARGE OF CONTRACT
PART 4 REMEDIES
 Law applicable to Law of Contract
Refer to Contract Act 1950
 DEFINITION OF CONTRACT

Section 2(h) of Contracts Act 1950 defined contract as:

“an agreement enforceable by law”
(Satu perjanjian yang boleh dikuatkuasakan oleh undang-undang)

Tafsiran ini menyatakan perlu ada suatu perjanjian yang

mengikat di antara pihak-pihak yang terlibat dalam
sebuah kontrak dan perjanjian itu mestilah yang boleh
dikuatkuasakan oleh undang-undang.
 CONTRACT
All contracts are agreements but no all
agreements are contract. In order for an
agreement to become a contract, there are
8 elements to be fulfilled.
 FORMATION OF CONTRACT
Elements of Contract
In order for a contract to be enforceable by law, contract should
be made out of certain elements:
1. (a) Proposal/Offer and (b) Acceptance
2. Consideration
3. Intention to Create Legal Relation
4. Certainty
5. Legal Capacity
6. Required Formalities
7. Legality of Objects
8. Free Consent
 Element Of Contract
1. PROPOSAL/OFFER & ACCEPTANCE
 The Element of Contract
1.(a) PROPOSAL/OFFER (Cadangan)
DEFINITION OF PROPOSAL
Section 2(a) Contracts Act 1950
“ Proposal exists when a person signifies his
willingness to do something or abstain from
doing something to get assent of another”

•Any act of a party which shows willingness to

do or not to do something is a proposal.
 The Element of Contract
1.(b) ACCEPTANCE (Penerimaan)
DEFINITION OF ACCEPTANCE
Section 2(b) Contract Act 1950 provides that:
“the person to whom the proposal is made signifies his
assent thereto the proposal is said to be accepted.”
 SIMPLE ILLUSTRATION
You propose to give Siti a book and Siti accepted your
proposal.
• The proposal has now become a promise.
• The person who made the proposal is known as
promisor.
• The person who accepted the proposal is known as
promisee.
So: You – promisor Siti - promisee
 INVITATION TO TREAT
(Pelawaan cadangan)
• Invitation to Treat is not proposal.
• It is important to draw a line between the two.
• Invitation to treat is a preliminary communication
which passes between the parties at the stage of
negotiation.
• Examples of Invitation to Treat are Display of Goods on
the shelf, with price tag and in the window sill.
• Others are advertisement, auction sale and tender.
• The one who is responding to the Invitation to treat is
the one who is making the proposal.
 INVITATION TO TREAT
(Pelawaan cadangan)

Invitation to treat must be distinguish from proposal

This is because when there is a proposal and the proposal is
accepted, it constitutes an agreement. On the other hand, when
there is an invitation to treat, it is not yet a proposal. The person
who accepts the invitation to treat is actually the person making
the proposal. When the person who is making the invitation to
treat, accepts the proposal, then there is an agreement.
 SIMPLE ILLUSTRATION
You are a shop owner. In your shop, there are many
goods. When you display the goods in the shop, you
are making an invitation to treat. The shopper is the
person who makes the proposal when he chooses
certain good from the display. You can refuse to sell it
to him if you want to. If you refuse, there is no
agreement between you and the shopper. But if you
accept the money and then sell the good to the
shopper, there is an agreement.
 EXAMPLE OF INVITATION TO TREAT
1. Display of goods
2. Advertisement
3. Auction
 Example of Invitation to Treat:
1. DISPLAY OF GOODS
Pharmaceutical Society of Great Britain v Boots Cash
Chemist Ltd
A customer went into Boots and pick up drugs without
supervision. Before the customer is able to purchase, his
action was being prevented by the chemist. The
customer was angry with the situation and reported the
matter to the Pharmaceutical Society stating that Boots
was selling drugs without supervision.
Court held that the display of goods on the shelf is an
invitation to treat and not a proposal. No contract exists
between customer and Boots. Thus Boots has not made
an unlawful sale.
 Example of Invitation to Treat:
2. ADVERTISEMENT
Coelho v The Public Services Commissions
The defendant advertised a job vacancy in the
newspaper. The plaintiff applied for the job and he was
employed by the defendant. After a while, the defendant
wanted to terminate his post on the ground that he was
on probation and the defendant has the right to
terminate his post.
Court held that advertisement is an invitation to treat.
When Coelho applied, he is making a proposal. When he
was employed, the defendant was accepting the
proposal. Thus a valid contract exists between them. The
defendant cannot simply terminate his post.
 Example of Invitation to Treat:
3. AUCTION SALE
Harris v Nickerson
It was informed to the public that an auction sale was
to include office furniture. It was found out that
there was no office furniture on auction. The plaintiff
sued for defendant for breach of contract.
Court held that auction sale is an invitation to treat.
Proposal only exists when the customer bids.
Contract only exist when the auctioneer accepts the
price bids by the customer. Therefore no contract
exists between the auctioneer and the customer.
 Patridge v Crittenden
• A notice “Bramble finch cocks and hens, 25s
each” was placed in the classified advertisement
page of a periodical. The cocks have been sold
out when the plaintiff attended the auction. The
plaintiff argued that the defendant has breach
the contract stating that the advertisement is an
offer and by attending the auction sale, the
plaintiff is making an acceptance.
• Court held that no contract exist between them.
Advertisement is not a proposal. It is an invitation
to treat.
• Generally, advertisements are invitations to treat, so the
person advertising is not compelled to sell to every
customer.
• In certain circumstances however, an advertisement can be
an offer, a well known example being the case of Carlill v
Carbolic Smoke Ball Company [1893] 1 QB 256, where it
was held that the defendants, who advertised that they
would pay anyone who used their product in the prescribed
manner and caught influenza £100 and said that they had
deposited £1,000 in the bank to show their good faith, has
made an offer to the whole world and were contractually
obliged to pay £100 to whoever accepted it by performing
the requested acts.
 COMMUNICATION OF PROPOSAL
(Komunikasi cadangan)

Section 4(1) Contracts Act 1950 provides that:

“ The communication of proposal is complete
(lengkap) when it comes to the knowledge of the
person to whom it is made”

Proposal can be made either to:

a)Particular person
b)General public
 Carlil v Carbolic Smoke Ball
Defendant supplied some kind of drugs to cure influenza.
The defendant advertised that whoever used their
product and still suffer from influenza will be offered a
sum of money. The plaintiff still suffered from influenza
after using the product. He then sued the company for
breach of contract.
Court held that advertisement was a proposal. The
plaintiff had accepted the offer made to the world at
large. Therefore the defendant has to pay the money to
the plaintiff.
The same rule applies to advertisement of reward for
return of lost property.
 COMMUNICATION OF PROPOSAL
(Komunikasi cadangan)
A proposal is said to have been communicated only if the party
who accepts it knew about the proposal
If a party accepting a proposal is not aware about the proposal,
then there is no contract.
SIMPLE ILLUSTRATION
You found your neighbor's lost cat and return it to him, unaware
of the fact that your neighbor had advertised in the newspaper
that reward will be given to those who found his cat. In this
situation, you cannot claim for the reward because there is no
contract between the two of you.
 R v Clarke (1927)
• An Australian Government offered a reward for
information in regards of a murder of two police
officers. X and Clarke were later arrested and
charged with the murders. Clarke later gave some
information to the Police which resulted in the arrest
of another person Y. Clarke was later found not
guilty and later he claimed for the reward.
• The court held that: His claim failed because
although he has seen the offer, it was not present to
his mind when he gave the information to the police.
 COUNTER PROPOSAL
(Cadangan balas)
• Counter proposal is a situation whereby after
a proposal has been made, suddenly either
one of the party ,make a new proposal.
• If any changes have been made to the
proposal, this is also a counter proposal.
• A counter proposal is treated as a rejection of
the original proposal.
 Hyde v Wrench
• The defendant offered to sell his estate for 1000
Pound. The plaintiff made a new proposal to buy
for 950 Pound and the defendant refused. Later
the plaintiff wrote again and agreed with 1000
Pound.
• Court held that there was no acceptance because
the plaintiff’s offer to buy for 950 Pound is a
counter proposal which had automatically
rejected the original proposal made by the
defendant.
 However

• Further information/ queries are different

from counter proposal.
Stevenson Jacques & Co v Mc Lean
• The defendant wrote to the plaintiff offering to sell iron
and would open the offer till Monday. On Monday
plaintiff sent telegram asking about method of delivery.
• The defendant sent a telegram telling about the sale to
another purchaser. The plaintiff again sent a telegram
accepting the offer without knowing about the sale to
another purchaser.
• Court held that there was a contract between them. No
counter proposal involved. Telegram by the plaintiff
asking about the method of delivery is just a query.
 REVOCATION OF PROPOSAL
(Pembatalan cadangan)

Section 5(1) Contract Act 1950 provides that:

“a proposal can be revoked at any time before
the communication of its acceptance is complete
as against the proposer but not afterwards”

Revocation must come to the knowledge of the

acceptor.
 Illustration to Section 5(1)
In acceptance by post or telegram, the
acceptance is complete once the letter is put
into the post box or telegram is delivered to the
appropriate telegraph office. If the proposer
wants to revoke the proposal, he must do it
before such posting/delivery.
 Byrne v Tienhoven
• It involved communication by post. On 8th
October, the plaintiff had sent acceptance by
telegram. On 20th October the letter of
acceptance reached the plaintiff.
• Court held that there was a contract between
the parties because the letter of revocation
reached the acceptor after the acceptor
accepted the proposal.
 REVOCATION OF PROPOSAL
Section 6 provides for the method of revocation of the proposal:
There are 4 ways:
• Section 6(a) by the communication of notice of revocation by
the proposer to the other party
• Section 6(b) by lapse of time prescribed in the proposal or
lapse of reasonable time if time is not prescribed in the
proposal
• Section 6(c) by failure of the acceptor to fulfill a condition
precedent to the acceptance
• Section 6(d) by the death or mental disorder of the proposer
if death or mental disorder comes to the knowledge of the
acceptor before acceptance.
 The Element of Contract
1.(b) ACCEPTANCE (Penerimaan)

DEFINITION OF ACCEPTANCE
Section 2(b) Contract Act 1950 provides that:
“the person to whom the proposal is made
signifies his assent thereto the proposal is said
to be accepted.”
According to Section 7(a) Contract Act 1950:
“ the acceptance must be made on exactly the
same as proposed without modifications or
variations”
 COMMUNICATION OF ACCEPTANCE
(Komunikasi cadangan)

It is a general rule that acceptance should

be communicated to the proposer in order
for a contract to be legally binding.
Section 4(2) Contract Act 1950
The communication of an acceptance is
complete:
A) as against the proposer when it
is put in the 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.
 SIMPLE ILLUSTRATION
You accepts Ali’s proposal by a letter sent by post. In
this situation, the communication of the acceptance is
complete:
As against Ali when the letter is posted,
As against you then the letter is received by Ali.
 METHOD ACCEPTING A PROPOSAL
By relying on Section 4(2) Contract Act 1950
there are two methods of accepting a
proposal.

First: is by using post.

Second: by using instantaneous
communication. Eg: telephone, answering
machine, telex, fax, e-mail, sms
ACCEPTANCE THROUGH POST
For this method of acceptance,
Section 4(2)(a) applies. The rule is
that acceptance is complete as
against the proposer once the
acceptor posted the letter even
though the proposer has no
knowledge of the acceptance.
• When the letter is posted, the acceptor has put it ‘in
course of transmission’ (dalam perjalanan
penghantaran) and he no longer has control over
the letter. Thus the transaction is binding
irrespective of delay or disappearance in the course
of transmission.

• The rule is also known as the Postal Rule. Under

common law, the rule is that acceptance is
complete once the letter is put in the letter box.
 Entores Ltd v Miles Far East Corporation

• According to Lord Denning, in acceptance by

post, acceptance is complete once the letter is
put in the letter box. It is the place where the
contract is made.
 Ignatius v Bell
• Communication by post is the method agreed
by the parties. Acceptance had been made by
post. However there was a delay in course of
transmission.
• Court held that acceptance was complete.
Contract exists between the parties.
 ACCEPTANCE THROUGH
INSTANTANEOUS COMMUNICATION
For this method of acceptance, Section
4(2)(b) applies, whereby acceptance is
complete as against the proposer when
the acceptance comes to the knowledge
of the proposer. It means that if the
acceptor is using the method of
accepting as above the acceptance is
complete only if the proposer is aware
of such acceptance.
 ACCEPTANCE THROUGH
INSTANTANEOUS COMMUNICATION
If the acceptor is using telephone,
he must make sure that he talks to
the proposer. If he is using
answering machine, proposer has
to listen to the message. If he is
using telex, fax, email or sms, the
proposer must have read the
message.
 Entores Ltd v Miles Far East
Corporation
• It was held that acceptance by instantaneous
communication takes place when and where it
is received.
 Brinkibon v Shatag Stahl
• In communication by telex, acceptance must
come to the knowledge of the proposer in
order for it to be legally binding.
 Silence
• Silence does not constitute an acceptance.
• Acceptance requires positive act of accepting.
 Fraser v Everett
• The defendant wanted to buy ‘transfer and
scripts’ shares. However the plaintiff sent
letters to the defendant informing that the
certificate has been exchanged for ‘bearer
warrant’ shares. The defendant however kept
quiet.
• Court held that the fact that the defendant
keep quiet did not constitute consent to such
changes. No acceptance exists.
 Felthouse v Bindley
• John wanted to sell his farm stock . In order to do so he
appointed the defendant as his agent/auctioneer. The
plaintiff wanted to purchase a horse belonging to John.
During negotiation the plaintiff said “if I do not hear from
you, I consider the horse mine”. John said to the defendant
not to sell the horse because it has already been sold to the
plaintiff.
• However the defendant sold the horse. The plaintiff sued
the defendant stating that the horse belonged to him
because he already had a contract with John.
• Court held that silence does not constitute acceptance. No
contract exists between John and the plaintiff. The plaintiff
fail in his claim.
 REVOCATION OF ACCEPTANCE
(Pembatalan penerimaan)

• Revocation refers to withdrawal of acceptance

by the acceptor.
Section 5(2) Contracts Act 1950 provides that:
“an acceptance may be revoked at any time
before the communication of the acceptance
is complete as against the acceptor but not
afterwards”
Section 4(3) Contract Act 1950:
The communication of revocation is complete as
against the:
A)Person who makes it when it is communicated
to the other person
B)Person who receives it, when it comes to his
knowledge