LAW OF CONTRACT

TOPIC 1

1
 DEFINITION OF CONTRACT
• The law governing contracts in Malaysia is the Contracts
Act 1950 (Act 136) (Revised 1974).

• S. 2(h): Contract may be defined as an agreement

enforceable by law.
• S. 2(g): An agreement NOT ENFORCEABLE by law is
VOID.

• A contract is an agreement enforceable by law between

two or more parties and will be a binding contract if all the
basic elements exist.
• The parties must agree on the rights and obligations to
be created under the contract as it requires consensus
ad idem i.e. the meeting of minds of the parties. 2
Cont.
• It is an agreement that can be enforced in a court of law.
The innocent party can commence an action against the
defaulting party in the event there has been a breach of
the contract.

• All contracts are agreement but not all agreements are

contracts as some agreements which are not enforceable
by law are not contracts as stated in s. 2(g).

• For an agreement to be enforceable by law, it must

contain all the essential elements.

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 ELEMENTS OF A VALID CONTRACT

1. Offer / proposal
2. Acceptance
3. Consideration
4. Intention to create legal relation
5. Certainty
6. Formalities
7. Capacity
8. Consent

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1. OFFER / PROPOSAL

• S. 2(a): Proposal is made “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.”

• Preston Corp Sdn Bhd v Edward Leong & Ors (1982)

• “An offer is an intimation of willingness by an offeror to
enter into a legally binding contract and that its terms
must either be expressly or impliedly indicate that it is to
become binding upon acceptance by the offeree.”

5
• S. 2(c): “The person making the offer or proposal is
called the ‘promisor’ and the person accepting the
proposal is called the ‘promisee’.”

• Offeror / proposer = Person who makes the offer

• Offeree / proposee = Person who receives the offer

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Requirement of valid offer:
1. It can be made expressly (in writing or orally) or can be
implied from conduct.

2. Must be clear, precise, definite and complete.

3. It must be communicated to the offeree.

• S. 4(1): “The communication of a proposal is complete
when it comes to the knowledge of the person to whom
it is made.”

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Identify an offer:

An offer must be
distinguished from:

Preliminary
negotiations Invitation to
Option
or mere treat (ITT)
supply of
information
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Preliminary negotiations or mere
supply of information:
• During negotiations, parties make all sorts of statement
to each other, including responding to a query or a mere
supply of information. But not all of these are proper offer
which can be accepted to form a contract.

• Harvey v Facey (1893)

• The plaintiff (P) sent a telegram to the defendant (D)
stating, ‘Will you sell us Bumper Hall Pen? Telegraph
lowest price.’ The D replied, ‘Lowest price £900’. The P
telegraphed back, ‘We agree to buy for £900.’

• Held: The D’s reply was not an offer to sell but was only
merely furnishing information. 9
Option:
• Option is merely an undertaking to keep the offer open for
a certain period of time.

• The purpose of an option is usually to give time to the

offeree to consider whether he wishes to buy the item
under consideration or to give him time to raise the
necessary finance.

• The offeror is at liberty to withdraw the proposal at any

time before acceptance of the proposal.

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Cont.
• Routledge v. Grant (1828)

• G offered to buy R’s house and gave him 6 weeks to

accept the offer. After 3 weeks, G withdrew his offer
before R purported to accept it.

• Held: G was entitled to withdraw the offer at any time

before acceptance even though the time limit had not
expired.

11
Cont.
• Where the offeree has paid a sum of money or provided
consideration to the proposer in return for the proposer’s
promise to keep the proposal open for an agreed period
of time, then the proposer’s promise becomes legally
binding.

• The proposer is not allowed to withdraw the proposal

before the expiry of its stated duration.

• The offeree must exercise his right to accept the proposal

within the stated duration, failing which it lapses.

12
Cont.
• Goldsborough Mort & Co Ltd v Quinn [1910] 10 CLR
674

• In consideration of the sum of 50 cents, D give P, 1 week

time to purchase his land. However, before end of week
and before the P accepted the offer, D had withdrew the
offer. P accepted the offer and claim for specific
performance.

• Held: The option with a consideration of 50 cents was

enforceable. Thus, D had to honor the option.

13
Cont.
• Voo Syun Mooi v. Yap Mooi Mooi [1984] 2 MLJ 48.
• In consideration of the sum of RM300, the Appellant
(App.) gave the Respondent (R) an option to purchase
the D’s property (i.e. to pay 10% deposit) within 2 weeks.
The cheque of the deposit had been given to and
acknowledged by the App.’s agent within the option
period but the App. denied it. The R sued the App. for
specific performance.

• Held: The R did exercise the option by tendering the 10%

deposit but this was rejected by the App. Thus, the court
granted the specific performance and ordered the App. to
complete the sale.
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Invitation to treat (ITT):
• ITT is not an offer, but an invitation to make an offer,
negotiate, deal and therefore, has no legal
consequences.

• It is a sort of preliminary communication which occurs

between the parties at the stage of negotiation.

• The distinction between a proposal and an ITT depends

primarily on:
• the INTENTION of the party making the statement; and

• how reasonable person to whom the statement is

made, perceives it.
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 i.
Advertisement

ii. Display of
goods
Examples of
ITT
iii. Auction

iv. Tender
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17
i. Advertisement
• General rule: Advertisements are merely supplying
information or notifying others regarding the advertiser’s
goods or services.

• It is inviting the other party to make an offer.

• Coelho v The Public Services Commission [1964] MLJ

12
• Held: The advertisement in a newspaper was an invitation
to qualified persons to apply. The resulting applications
were offers, which could either be accepted simply or by
imposing conditions as terms of the contract in addition to
those found in the advertisement. 18
Cont.
• Partridge v Crittenden [1968] 2 All ER 421
• The D advertised live wild birds for sale in a periodical
bird magazine. The D was charged with ‘offering for sale’
a wild bird under the Protection of Birds Act 1954.
• Held: The advertisement was not an offer but only an ITT.

• Eckhardt Marine GMBH v Sheriff, High Court of

Malaya, Seremban & Ors [2001] 4 MLJ 49
• “… as a general rule, an advertisement is considered by
courts to be not an offer but a mere invitation to treat, that
is to say, an offer to make offers”.

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20
Cont.
• Exception: An advertisement may be considered as an offer if it
is clear from the advertisement that the advertiser intends their
words or conduct to constitute an offer.
• Carlill v Carbolic Smoke Ball Co. Ltd [1893] 1 QB 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 manner and
for a specified period
• The plaintiff Mrs Carlill bought and used the smoke balls as
prescribed and successfully caught influenza. She sued the
company for the promised reward.
• The defendant contended that the contract is made with all the
world that is with everybody and that one cannot contract with
everybody. 21
• The Court of Appeal held that an offer (proposal)
could be made to the entire world because the contract
will only be made with that limited portion of the
public who came forward and performed the condition
on the faith of the advertisement.

• The English Court of Appeal decided, inter alia, that:-

by depositing ₤100 with Alliance Bank, the Co. had
demonstrated their intention to be legally bound by the
terms of the offer;

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The Court of Appeal further laid down the following
principles:-
• By advertising the offer to the public, this constituted a
general offer made to the public at large. There was reward
being offered.
• Once Mrs. Carlill, the Plaintiff, used the smoke balls three
times daily for over a period of 2 weeks and having
contracted influenza, this was regarded as acceptance by
conduct.
• Once there is a promise made in return of performance of an
act, this constitute a unilateral contract.
• In short; it was a general offer made to the world at large
and the Plaintiff, by using the smoke balls three times daily
for over a period of 2 weeks and having contracted
influenza, had accepted the offer. This is known as
unilateral contract. 23
 UNILATERAL CONTRACT
In a nutshell, UC:-
• Is where the offer is made to the world at large and only the
identity of offeror/proposer is known.
• When offer/proposal is made in return of performance of an
act.
• When reward is being offered.
• The requirement for acceptance to be communicated was
impliedly waived in this contract.
• It can be withdrawn by taking reasonable steps to bring the
withdrawal to the attention of the promisee. It can be
considered reasonable if the promisee has not taken any
step yet to perform the required act
24
Cont.
• Errington v Errington Woods [1952] 1 KB 290
• A father purchased a house for his son and his wife to
live in. He paid the deposit and promise the couple that if
they pay the mortgage installments, the house would be
transferred to them. The father died and the mother
inherited the house. The son went to live with the mother
but the wife refused and continued to pay the
installments. The mother brought an action to remove the
wife from the house.

• Held: The wife was entitled to remain in the house as the

father had made a unilateral contract. The wife was in
course of performing the acceptance by paying the
installments.

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ii. Display of Goods
• The general rule is that the goods on display, with or
without price tags, are not offers but merely ITT.

• The displayed items is not an offer by the shop to sell at

the marked price and consequently cannot be ‘accepted’
by a potential customer.

• Fisher v Bell (1961)

• A shopkeeper had offered for sale a flick knife and
exhibited it in his shop window. He was convicted for sale
of offensive weapons.
• Held: The display in a shop window is an ITT, not an offer.
Thus, the conviction was quashed. 26
Cont.
• Pharmaceutical Society of Great Britain v Boots Cash
Chemist Ltd [1953] 1 QB 401

• The Ds were charged for unlawfully sell certain poisons.

A customer pick medicine contained drugs off the shelves
and pay for them at the counter.

• Held: The display was only an ITT. A proposal to buy was

made when the customer put the articles in the basket.
So the contract would only be made at the cashier’s
desk. Thus, the chemist did not made an unlawful sale.
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iii. Auction
• The sales by auction is only an ITT, inviting the public to
bid for a particular article.

• The bid itself is an offer and the auctioneer can either

accept or reject the offer.

• M & J Frozen Food Sdn Bhd v. Siland Sdn Bhd [1994]

1 MLJ 303
• Held: The bids are offers and the striking of the hammer
means acceptance. The fall of the hammer only signifies
that the goods would no longer be offered to prospective
buyers and the successful bidder could not be permitted
to retract his acceptance.
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Cont.

• Harris v Nickerson [1873] LR8 QB 286

• An auctioneer advertised an auction in a newspaper. P

saw the advertisement and travelled to the sale only to
find that the items he was interested in bidding for had
been withdrawn.

• Held: The advertisement of the auction was not a

guarantee that it would be held but only an ITT.
Therefore, there was no contract.

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iv. Tender
• A tender is a call for persons to put in offers to do something or
supply goods.

• If a company advertises inviting tenders to supply goods or

services, the invitation to tender is not an offer.

• When parties submit their tenders in reply to the advertisement,

then the tenders will amount to an offer.

• The company has the option whether to accept or reject the

tender submitted.

• If the tender is accepted, the person who submitted the tender will
be bound to supply and the advertiser will be bound to accept the
terms according to the tender submitted. 30
Termination of an offer
A proposal is terminated by the following reasons:

1. It is revoked by the communication of the notice of

revocation by the offeror – s. 6(a)

• s. 5(1): An offeror may withdraw his offer at anytime

before a proper acceptance has been made.

• Routledge v Grant (1828)

2. It is rejected by the offeree.

3. When a counter offer is made by the offeree – Hyde v

31
Wrench (1840)
Cont.
4. The time prescribed for the acceptance elapses, or if no
time prescribed for an acceptance, by the lapse of
reasonable time – s. 6(b)

• Ramsgate v Victoria Hotel Company v Montefiore

(1866)

5. The failure of the proposee to fulfill a condition

precedent to an acceptance – s. 6(c)

6. The death or mental disorder of the proposer, provided

that the proposee must know this fact before
acceptance – s. 6(d)
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2. ACCEPTANCE
• An acceptance is the exercise of the power by the offeree
indicating his assent to the transaction in response to the
offer.

• S. 2(b): The offer is accepted when the offeree signifies

his assent to the offer.

• S. 2(c): The person accepting the offer = Promisee

• Upon such acceptance, an agreement is created as

between the parties.
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Requirement of a valid acceptance:
1. S. 9: It can be made expressly (in writing or orally) or
can be implied from conduct.

2. The offeree must be aware or have knowledge of the

offer.

• It must have been made with reference to the proposal

and should not be a coincidence of what was offered
by the offeror.

• The offer must have been present to his mind when he

did the act which constituted the acceptance.
34
Cont.
• R v. Clarke (1927).
• There was an advertisement of a reward for information
leading to the arrest and conviction of the persons
responsible for the murders of 2 police officers. The D
and another person were arrested and charged with the
murders. D then gave information leading to the arrest of
the third person and claimed the reward money.

• Held: Although D had seen the offer, it was not present to

his mind and he had forgotten about it. There could not
be assent without knowledge of the offer. Ignorance of
the offer is the same thing, whether due to never hearing
of it or to forgetting about it.
35
Cont.
3. It must be made within a reasonable time.

• What is a reasonable time would depend on the circumstances of

the case.

• Ramsgate Victoria Hotel Co Ltd v Montefiore [1866] LR 1

EXCH 109
• D applied for shares but only after almost 6 month later, he had
been told that his offer has been accepted. The shares had been
allotted to him and the balance owing on the shares was now
due. D refused to pay and the P sued D for breach of contract.

• Held: The offer to purchase the shares had not been accepted
within a reasonable time and the offer had been lapsed. Thus, no
contract was created.
36
Cont.

4. S. 7(a): It must be absolute and unqualified.

• It must be accepted in exactly the same terms of the

proposal i.e. it must be the ‘mirror image’ of the offer.

• Any modifications to the terms of the proposal by the

offeree would amount to a counter proposal.

• Effect: It operates as a rejection of the original proposal

which cannot be revived and subsequently accepted.
37
Cont.

• Hyde v Wrench (1840)

• D offered to sell his farm for £1000 to P. P agreed to
purchase for £950 but the D refused to accept. Later on,
P agreed to pay the original price but then the D refused
to sell at the original price. P sued for specific
performance.

• Held: Since the original offer has been altered, it acted as

a rejection of the original offer. Thus, the original offer
cannot be revived.

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Communication of acceptance
• Acceptance is only effective when it is communicated or
brought to the notice of the offeror.

• S. 7(b): Acceptance must be expressed in some usual

and reasonable manner, unless the proposer prescribes
the manner in which it is to be accepted.

• However, the proposer cannot prescribe silence as a

manner of acceptance as silent cannot amount to
acceptance.

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Cont.
• Acceptance must be communicated clearly and cannot
be imposed due to silence on one of the parties.

• Felthouse v Bindley (1862)

• P wrote to his nephew, offering to buy his horse by
stating that, ‘If I hear no more about him, I consider the
horse mine…’ His nephew intended to sell the horse to P
but did not reply the letter. He told the auctioneer,
Bindley, not to sell the horse at the auction but Bindley
accidently sold it. The P sued the auctioneer.

• Held: The nephew’s acceptance had not been

communicated to the P. Thus, the horse did not belong to
the P.
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Cont.
• S. 8: Acceptance may be made by performance of the
conditions or acts stipulated by the offeror i.e. unilateral
contract.

• Unilateral contract is a promise made in return for the

performance of an act. – refer Unilateral contract.

• R v. Clarke
• Carlil v Carbolic Smoke Ball Co. Ltd. (1892)
• Errington v Errington Woods [1952] 1 KB 290

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Cont.
• Soulsbury v. Soulsbury [2008]
• 1986 Husband (H) and wife (W) divorced and the
court ordered H to make periodical payments.
• 1989 H suggested to leave her £100,000 in his will
instead of paying the periodical payments.
• 1991 H made a will bequeathing that sum to W.
• 1993 Both agreed that if W did not enforce the
periodical payments order, she will receive the sum.
• 2002 H married the D and he died the same day.
• 2003 W sued D for the sum of £100,000 for breach
of the agreement.
• Held: The W entitled for the sum as on H’s death, W had
completed all possible performance of the act required
for enforcement of H’s promise.”
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Acceptance by post
• General rule: The communication of acceptance is
complete only when it has been brought to the notice of
the proposer – s. 4(1)

• However, when parties contemplate to the use of post as

a means of communicating acceptance, the rules are
different.

• Acceptance is complete upon posting.

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Cont.
• S. 4(2): 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;

b) As against the acceptor, when it comes to the

knowledge of the proposer.

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Cont.

• In other words:

a) The proposer is bound by the contract at the time the

acceptor posts his letter of acceptance regardless the
proposer has knowledge of the acceptor’s action.

• Provided that the letter is correctly addressed, properly

stamped and placed into the post box.

• The contract is ONLY bound the proposer and the

proposee still can revoke the acceptance, if the letter
still not reach the proposer.
45
Cont.

b) The acceptor (proposee) will only be bound once the

proposer receives and has knowledge of the letter of
acceptance.

Once the proposer has received the

letter of acceptance, the proposee is
bound with the contract and therefore,
he cannot revoke his acceptance
anymore.

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Cont.
• Henthorn v. Fraser [1892] 2 Ch 27 (CA)
• D called P to negotiate the purchase of some houses. D
handed the P a note giving him the option to purchase
within 14 days. The next day, D posted to H a withdrawal
of the offer but did not reach P until 5 pm. Meanwhile, at
3.50 pm, P posted to the D an unconditional acceptance
of the offer, which was delivered to D after its office had
closed. The letter was opened by the D the next morning.

• Held: It is reasonable for the D to expect an acceptance

by post as they are living in different towns. Thus, the
acceptance is complete as soon as it is posted.
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Revocation of an acceptance
• S. 5(2): An acceptance may be revoked at any time
before communication of the acceptance is complete as
against the offeree but not afterwards.

• S. 4(3): The communication of revocation is complete:

a) As against the person who makes it, when it is put in
the course of transmission to the offeror,
b) As against the person to whom it is made, when it
comes to his knowledge.

• Once there is proper acceptance, the agreement is

considered as complete and there is a valid contract
which cannot be revoked.
48
Cont.
• Byrne v. Van Tienhoven (1880)
• 1/10 D in Cardiff posted a letter to P in New York
offering to sell 1,000 boxes of tin plates.
• 8/10 D posted a letter revoking the offer of 1/10.
• 11/10 P received the offer letter posted on 1/10 &
immediately sent an acceptance by telegram to D
the same day. He followed up with a letter of
acceptance on 15/10.
• 20/10 P received D’s revocation letter.

• Held: The revocation of the offer posted by D on 8/10

was not effective until it was communicated to the offeree
i.e. on 20/10 when it was received by P. D was bound by
the contract that came into existence on 11/10 when the
acceptance was sent by telegram. 49