You are on page 1of 76

Introduction

Everyday in our life we enter into contracts We enter into contracts when : we buy groceries in the supermarket we eat in a restaurant we get into a bus to travel we get a can of coca cola from the vending machine

Strictly speaking contracts need not be in writing or even verbal as it can be inferred from the conduct of parties A contract need not be formally written down and need not involve documents with complicated rules and regulations A contract need not involve millions or billions of dollars

What is a contract
A contract is an agreement between 2 or more parties that is legally binding between them. Under Section 2(h) of the CA 1950, a contract is an agreement enforceable by law The principal legislation for the law of contract is the Contracts Act 1950

Continue
The basis of all contracts is an agreement, that is to say, all contracts must be built upon an agreement. But not all agreements are automatically contracts.

Contracts
Agreements

Agreements are contracts if they fulfill the essential elements of a contract.

Essential elements of a contract


The main elements of a valid contract are: 1. Offer and acceptance 2. Consideration 3. Intention to create legal relation 4. Certainty 5. Legal capacity 6. Free consent 7. Objects 8. Required formalities

What is a proposal?
An agreement between 2 or more parties is constituted by a proposal and an acceptance The word proposal in the Contracts Act 1950 bears the same meaning as offer in English law. 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 such act or abstinence (S2(a) CA 1950).

Eg A by offering to buy Bs car for RM10,000.00 in the hope that B will accept is making a proposal Then according to S2(b), when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Upon such acceptance by B an agreement between the parties is created. The proposal has become a promise & the party making the proposal is now referred to as the promisor & the party accepting the proposal, is known as the promisee.

Thus from the example Bs acceptance of As proposal to buy the car establishes an agreement or promise A is the promisor B is the promisee

Invitation to Treat (ITT)


A proposal must be distinguished from an ITT The CA does not contain any provision with respect to ITT thus English Law is applicable An ITT is not a proposal but a sort of preliminary communication which passes between the parties at the stage of negotiation ITT is only an invitation to induce offers or to instigate negotiations Thus upon the customer making an offer it is up to the person making the ITT to accept or reject the offer

Examples of ITT
A price list A display of goods with price tags in a self-service supermarket An advertisement A tender An auctioneer inviting bids for a particular article

Why isnt ITT a proposal?


Auction If an auctioneer is considered making a proposal (not an ITT) when inviting bids then when a bidder makes a bid he is accepting the proposal and an agreement comes into being at that stage This defeats the very purpose of an auction ie to get the highest price for the auctioned article

Thus the actual state of law is that the auctioneer is only making an invitation to treat ie merely inviting bidders to make proposal which the auctioneer may accept or decline

Continue
Display of goods in a shop Generally do not constitute a proposal to sell The shop owner merely holds himself prepared to consider proposals made to him at the suggested prices The invitation is not capable of being accepted as it is not a proposal The proposal is in fact made by the customer when he selects the desired goods

Continue This well established rule was clearly determined by the celebrated case of Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd [1953]

Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd [1953]


Facts: The defendants were charged under the Pharmacy and Poisons Act 1933 (U.K.) which provided that it was unlawful to sell certain poisons unless such sale was supervised by a registered pharmacist. The case depended on whether a sale had occurred in the selfservice shop when a customer selected articles, which he desired to purchase and placed them in a wire basket. 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 was authorized to prevent a sale.

Continue
Held: the display was 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 only be made at the cashiers desk. That being the principle, the shop owners had not made an unlawful sale.

Rationale of ITT
Common sense and realities of commercial transactions If selecting an article from the display shelf constitutes a sale ownership will have passed to the customer at the point of selection though he has not paid for it and the customer will not be able to change his mind about the purchase

Advertisement Similar problems would arise in advertisement if they were treated as a proposal to be accepted by readers Items for sale may have been completely sold out and sellers would be liable for breach if they could not supply all the items offered

Partridge v Crittenden (1968)


Facts : appellant had inserted in a periodical entitled Cage and Aviary Birds a notice Bramblefinch cocks and hens, 25s each. It appeared under the general heading of Classified Advertisement and the words offer for sale was not used. He was charged with unlawfully offering for sale a wild live bird contrary to the provision of the Protection of Birds Act 1954 and was convicted. He appealed. Held (by Lord Parker) quashing the conviction : when one is dealing with advertisements and circulars, unless they indeed come from manufacturers, there is business sense in their being construed as invitations to treat and not offers for sale

Harris v Nickerson (1873) Facts : the defendant, acting in good faith, advertised that certain furniture would be auctioned on a particular day. The plaintiff travelled to the auction with a commission to buy the furniture but it was withdrawn from the sale. The plaintiff failed to recover damages for loss suffered in travelling to the advertised place of the auction sale as the court held that the advertisement was an invitation to treat and not an offer.

To whom can A proposal be made?


A proposal can either be made to 1. a particular person or 2. to the general public Proposal made to a particular person, may only be accepted by that person. This is based on the wordings of Section 2(b) of the CA, which provides when the person to whom the proposal is made If proposal is made to the general public, then anyone who meets all the terms of the proposal may accept.

Carlill v Carbolic Smoke Ball Co. [1893]


Facts:

The defendants company advertised that they would offer 1000 pound to anyone who still succumbs to influenza after using the companys medicine according to the instructions for a fixed period. The plaintiff duly used the product, but nevertheless contracted influenza. The plaintiff then sued for the money.
Held:

The Court of Appeal decided that the plaintiff had accepted the offer of the company made to the world at large and is therefore entitled for the money.

Similarly, as a general rule, an advertisement of reward for the return of lost property would be treated as an offer to the general public

WARNING!
An advertisement could be an invitation to treat or a proposal.
Whether an advertisement is a proposal or an invitation to treat depends on the intention of the parties in each case.

The courts have held that advertisements of bilateral contracts (like job advertisement) are not offers/proposals, whereas advertisements of unilateral contracts (like Carlills case and advertisements of rewards for returning lost things) are construed to be proposal/offers.

Bilateral Contracts
In bilateral contracts, all parties promise to do something for one another; bilateral contracts bind all parties and are enforceable against all parties. For instance, in a job advertisement, the job advertisement itself is not an offer but an ITT, the applicant is actually making an offer to work for the advertiser when he applies for the job and the advertiser, if they accept the applicants offer, promise to give the applicant a position and remuneration in accordance with the advertisement. (a promise for a promise)

Majunder v AG of Sarawak (1967) The Federal Court held that an advertisement in the newspaper for the post of a doctor was an invitation to treat.

Unilateral Contracts
In unilateral contracts, one party promises to do something to induce the other party to do something; unilateral contracts are binding on and enforceable against only one party, i.e. the party that makes the promise. For instance, an advertisement to pay a reward for returning lost pets. ( a promise for an act). This advertisement is an offer.

Communication of proposal
Unless there is communication of the proposal as suggested in S2(a) ie when one person signifies to another his willingness to do or abstain from doing anything.. there can be no acceptance to form an agreement Likewise a party accepting a proposal must be aware of the existence of the proposal

The fact that the person accepting the offer has done something which coincides with the proposal without being aware of the proposal does not bring an agreement into being Eg 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 reward for its return

R v Clarke (1927)
Facts:
The Western Australian Government offered a reward for information leading to the arrest and conviction of persons responsible for the murder of 2 police officers. X and Clarke were arrested and charged with murders but shortly after, Clarke gave information, which led to the arrest of another person, Y. X & Y were later convicted for the offence and Clarke who did not commit the murders claimed the reward.

Held:
The court refused to grant his claim. It failed on the grounds that the information was given to clear himself from the murder charge & not in reliance on the offer of reward.

What is an acceptance?
S2(c) When the person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal once accepted becomes a promise.

Rules of acceptance
1. acceptance must be absolute and unqualified 2. acceptance must be made in positive manner ie acceptance must be communicated 3. acceptance must be made within reasonable time

1. Acceptance must be absolute and unqualified


Acceptance must be made on exactly the same terms as proposed without modifications or variations ie acceptance must be absolute and unqualified S7(a) Modification or variation of proposal does not constitute acceptance but amounts to counter proposal by party to whom original offer was made A counter proposal is a rejection of the original proposal

Hyde v. Wrench [1840]


Facts:
The defendant offered to sell his estate to the plaintiff on June 6 for 1000 pound. On June 8 in reply, plaintiff made a counter proposal to purchase the estate at 950 pound. On June 27, the defendant refused to accept this offer. Two days later, the plaintiff wrote to the defendant that he was prepared to pay 1000 pound. The defendant refused and the plaintiff sued for specific performance.

Held:
The Court ruled that theres no acceptance because the plaintiffs letter on 8th June had rejected the original proposal, which could not be revived.

A distinction needs to be drawn between a counter proposal and a request for further information

Whether a communication amounts to a counter offer or not is sometimes difficult to determine. The offeree may reply to the offer in terms which leave it uncertain whether he is making a counter offer or merely seeking further information before making up his mind A mere request for information does not destroy the offer

Stevenson v. Mclean (1880)


Facts: the defendant offered on Saturday to sell to the plaintiff 3,300 tons of iron at 40s nett cash, open till Monday. Early on Monday the plaintiffs telegraphed to the defendant : Please wire whether you would accept 40 for delivery over 2 months or if not the longest limit you would give. No reply was received, so by a telegram sent at 1.34 pm on the same day the plaintiffs accepted the offer to sell at 40 cash. Meanwhile the defendant sold the iron to a 3rd person and informed the plaintiffs of this in a telegram dispatched at 1.25. The telegrams crossed.

The plaintiffs sued to recover damages for breach of contract Court : the plaintiffs had not made a counter offer but had addressed to the defendant a mere inquiry which should have been answered and not treated as a rejection of the offer

Communication of acceptance
General rule : acceptance of proposal must be communicated to the proposer for a binding contract to exist between the parties See S7(b) Acceptance must be communicated in ordinary, usual and reasonable manner if no method of acceptance is prescribed

But if proposal specifies particular mode of acceptance and it is not followed the proposer is entitled to insist on it Necessary that proposer acts within reasonable time after communication of acceptance If he does nothing he would be deemed to have accepted The duty to object lies with proposer

Exceptions to general rule


1. proposer has dispensed with the need for it 2. proposer allows party to whom proposal is made to perform conditions of proposal is acceptance taking the form of performance of an act stated in the proposal S8 & Carlills case 3. proposer allows acceptance of any consideration for a reciprocal promise which may be offerd with a proposal

Reciprocal promise = promise which forms the consideration or part of consideration for each offer S2(f) Eg where X sends B a cheque for RM500.00 with proposal that it will be the consideration for Bs agreement to sell his motorcycle, B will be deemed to have accepted the proposal if he cashes the cheque though he has not communicated his acceptance to X

Though communication of acceptance may be waived it is still necessary to do something positive to accept a proposal like actually performing the conditions of proposal or express acceptance in acceptable manner S2(b) requires person to whom the proposal is made to signify his assent which implies positive act of acceptance on part of addressee

2. Acceptance must be made in positive manner

Silence, absence of response or just total disregard of proposal is not acceptance as there is no positive act relating to the proposal

Felthouse v. Bindley (1862) Facts : the Plaintiff, Paul Felthouse, wrote to his nephew, John on 2 February offering to buy his horse for 30 pounds 15 s, and adding If I hear no more about him, I consider the horse mine at that price. The nephew made no reply to this letter but intimated to the defendant, an auctioneer, who was going to sell his stock, that the horse was to be kept out of the sale. The defendant inadvertently sold the horse to a 3rd party at an auction held on 25 February and the Plaintiff sued him in conversion.

The court held that the action must fail as there had been no acceptance of the plaintiffs offer before 25 February and the plaintiff had therefore at that date no title to maintain conversion
Note : conversion is a tort of wrongfully dealing with a persons goods in a way that constitutes a denial of the owners right

Fraser v Everett (1889) Facts : defendant had contracted for the purchase of transfer and scrip shares but were tendered bearerwarrants shares Held : defendant could not be compelled to accept bearer warrants shares and his failure to reply to the plaintiffs letter informing him that the certificates had been exchanged for bearer warrant shares could not be treated as a waiver of objection. His silent did not constitute consent

3.Acceptance must be made within a reasonable time


Section 6(b) of the CA reads, a proposal is revoked by the lapse of the time prescribed, or if no time is so prescribed, by the lapse of reasonable time, without communication of the acceptance What amounts to reasonable time? It is a question of fact depending on the circumstances of each case, e.g. the nature of the subject matter or the method by which the offer is communicated.

Fraser v Everett (1889) The contract was for shares expected to be mailed about the end of March and which if mailed would have arrived on 23 April. The court held that it was not a delivery within reasonable time to have scrips mailed early in April and offered to defendant on 15 May. The fact that the mining shares were of a very fluctuating character was a significant factor in determining the issue of time

What constitute a reasonable time is a question of fact depending on the circumstances such as tha nature of the subject matter In Fraser v Everett the nature of the shares was such that they were of fluctuating character so that one would expect prompt delivery

Continue
Hashim Yeop A.Sani J. in the case Macon Works & Trading Sdn Bhd v. Phang Hon Chin, relates the rationale of this rule:
An offer lapses after a reasonable time not because this must be implied in the offer but because failure to accept within a reasonable time implies rejection by the offeree. As a consequence, the Court can take into account the conduct of the parties after the offer was made in deciding whether the offeree has allowed too long a time to lapse before accepting.

Acceptance through post


When is communication of acceptance complete? General Rule: An acceptance is completely communicated when it is actually brought to the notice or comes to the actual knowledge of the offeror.

Exception : The Postal Rule


Section 4(2) of the CA provides an exception to the general rule of communication of acceptance where the parties have intended the use of the post as a means of communication. According to S4(2) :
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; & (b) as against the acceptor, when it comes to the knowledge of the proposer.

Continue
See illustration (b) of Section 4: B accepts As proposal by a letter sent by post. The communication is complete: as against A, when the letter is posted; as against B, when the letter is received by A.

Effect of the Postal Rule


According to S4(2)(a) the proposer is bound when the offeree posts the letter of acceptance even though the proposer has no knowledge of the acceptance. When the letter is posted, the acceptor has put it in a course of transmission in such a way that he no longer has any control over it. The transaction becomes binding upon the proposer irrespective of any delay or disappearance of the letter of acceptance in the course of transit/transmission.

Entores Ltd v Miles far East Corporation (1955) Denning LJ : when a contract is made by post .. acceptance is complete as soon as the letter is put into the post box and that is the place where the contract is made

Adams v Lindsell (1818) Facts:The defendant wrote to the plaintiff offering to sell wool on certain terms. The defendant however, misdirected the letter and it reached the plaintiff later than usual. Upon receiving the letter of offer, the plaintiff immediately posted his acceptance. Meanwhile, the defendant (thinking that the plaintiff was not interested in the offer) had already sold the wool to a third party. Held: It was held by the court that acceptance was complete upon posting.

Ignatius v Bell (1913) Facts : Plaintiff sued for specific performance of an option agreement which purported to give him an option of purchasing the defendants rights over a piece of land. The option was to be exercised on or before 20.08.1912. parties had contemplated the use of post as means of communication. Plaintiff sent notice of acceptance by registered post in Klang on 16.08.1912 but it was not delivered to the defendant until 25.08.1912 as the defendant 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 plaintiff when the letter was posted on 16 August

Rationale of Postal Rule

Postal rule has evolved from reasons of practical convenience arising from delay that is inevitable in delivering letters

Continue
On the other hand, acceptance is complete as against the acceptor only when the letter of acceptance reaches and comes to the knowledge of the proposer. This means that while the proposer is bound upon dispatch of acceptance by the acceptor, the acceptor himself is not bound until it is actually received by the proposer.

Criticism of the Rule


When 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 On the other hand the acceptor remains free till actual receipt by the proposer This implies that pending receipt of the acceptance by the proposer the acceptor may withdraw his acceptance The proposer is severely disadvantaged by the rule and is placed in an unequal position

Protection of proposers Stipulate in proposal that acceptance is complete only upon receipt not upon posting This would exclude the postal rule by express terms of proposal

Scope of the Rule


The postal rule also applies to telegram sent through post office. But instantaneous communication such as telephone and telex are governed by the general rule.

Entores Ltd v Miles Far East Corp (1955) So far as Telex messages are concerned . the parties are . in each others presence . just as in telephonic communication .. the general rule [is] that there is no binding contract until notice of the acceptance is received by the offeror

Revocation of proposal
Once a proposal is communicated, it remains open until it lapses or is withdrawn. A proposal may be revoked at any time before acceptance. Section 5(1) of the CA provides that a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

Continue
There are a few ways by which a proposal may be revoked. Section 6 states that a proposal is revoked:

a) By communication of notice of revocation b) By lapse of the time prescribed/ by lapse of reasonable time c) By failure of the acceptor to fulfill the condition of the proposal d) By death /mental disorder of the proposer, if the fact of his death or mental disorder comes to the knowledge of the acceptor before acceptance.

S6(a) Revocation by communication of Notice of Revocation by proposer to the other party Revocation of the proposal must be communicated by the proposer to the other party before it accepts. In the event of acceptance by post or telegram, the acceptance is complete as against the proposer upon posting or delivery of the telegram to the appropriate telegraph office. Therefore, withdrawal of the proposal must necessarily be communicated by the proposer to the offeree before such posting or delivery.

Continue
The application of this rule is found in the Illustration to Sec. 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.

Byrne v. Tienhoven (1880)


Facts:

In this case the defendant offered to sell 1,000 boxes of tinplates to the plaintiff. The following communications took place:

1 October: Defendant posted letter of offer in Cardiff to the plaintiff in New York. 8 October: Defendant posted a letter revoking the offer of October 1. 11 October: Plaintiff received the letter of offer posted on October 1 and sent acceptance by telegram the same day. It also followed up with letter of acceptance on 15 October. 20 October: Defendants letter of revocation received by plaintiff.

Continue
Held: 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 plaintiff who had already accepted the offer on 11 October when the telegram was sent.

S6(b) Revocation by lapse of time prescribed/ lapse of reasonable time


Subsection (b) deals with revocation by lapse of time and provides for two situations: i. Lapse of time occurring upon the expiration of the time prescribed in the proposal for its acceptance; & ii. Where no time is prescribed, by the lapse of a reasonable time. What a reasonable time is depends on the facts and circumstances of each case.

Facts:

Ramsgate Victoria Hotel Co. v Montefiore (1866)

The defendant applied for shares in the company in June and paid a deposit into the companys bank. It was not till November that the company informed the defendant that shares had been allotted to him and that the balance of the purchase price should be paid. The defendant refused to accept the shares. The refusal was justified because such a proposal should have been accepted within a reasonable time. The period between June and November was clearly not reasonable. The rationale for this rule, was stated by Hashim Yeop A Sani J. in Macon Works & Trading Sdn Bhd v. Phang Hon Chin & Anor. [1976]

Held:

S6(c) Revocation by failure of the acceptor to fulfill the condition precedent to acceptance Subsection (c) provides that a proposal may be revoked where the acceptor fails to fulfill a condition precedent to acceptance. For instance, a company offers to employ an applicant on condition that he passes a skills test. If the applicant fails the test, the proposal is obviously revoked because the applicant has failed to fulfill a condition precedent.

Subsection (d) deals with death or mental disorder of the proposer subsequent to the communication of the proposal. The happening of these two events does not automatically result in the demise of the proposal. The fact of the death or mental disorder must be known to the acceptor before acceptance. Only then the proposal is no longer available for acceptance. Acceptance without prior knowledge of the death or mental disorder of the proposer is nevertheless, a good acceptance.

S6(d) Revocation by death /mental disorder of the proposer

Revocation of acceptance
It may seem strange that an acceptance can be revoked but that is the law with respect to those acceptance which is not complete as against the acceptor. Section 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.

Continue
The Illustration to section 5 provides an example of 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 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