CHAPTER 2: THE

FORMATION OF CONTRACT –
PROPOSAL & ACCEPTANCE

INS 536
LAW of CONTRACT AND INSURANCE
CONTRACTS
 Section 2(h), Contract Act 1950:
An agreement enforceable by law is a contract
> Contract are agreement (but not all agreement are
contracts)
> contract are enforceable by law ( agreements which are
not enforceable by law are not contracts)

 Enforceable by law (Legally enforceable)

> Legal recognition by the court
> Right of parties to have disputes settled in courts
 Contract must comply with essential legal requirements:

Proposal

Acceptance

Intention to be legally bound

Legal capacity to contract

Consideration

Legality of object and Certainty of terms

 It is essential that all the above requirement are met at

the stage when a contract is made
 DIFFERENCES BETWEEN
CONTRACT & MERE AGREEMENT

CONTRACT MERE AGREEMENT

Contracts comply with all the rules

Not all the rules relating to the
relating to all the elements of
elements of contract are met
contract.

‘Right’ under agreements are not legally

Rights under a contract are legally
enforceable as they are not legally
recognized and thus enforceable
acknowledge.
PROPOSAL AND
ACCEPTANCE
PROPOSAL
PROPOSAL
 Proposal is an offer to start a contract.
 Sec 2 (a) of the CA 1950 deals with “offer”,
which referred to as a “proposal”.
 An offer is an indication by one party to another
of his willingness to enter into a legally binding
contract, on certain specified terms.
 Offer might be define as expression/willingness
of proposer/offeror to make contract
immediately after offeree accept the offer.
PROPOSAL
o Sec 2 (a) Contract Act 1950 stated that a valid proposal must
involve:

 Signification by a proposer his willingness to do/abstain from doing

an act to individual/specified group/world at large AND proposer is
intent to obtain the assent of the other to the act or abstinence.
 If proposal is made to an individual/specified group – only that

individual/member of that group may accept proposal.

 However if the proposal signify world at large – any party

responded considered as accepting the offer.

 CASE: Carlill v Carbolic Smoke Ball Company (1893)

 The signification can be done

 Verbally

 In writing

 By conduct (raising hand at auction)

COMMUNICATION OF
PROPOSAL/OFFER
 The offer must be communicated

 Sec4(1) CA 1950: The communication is complete when it comes to

the knowledge of the person to whom it is made
 Ex: If offer by letter – communication is complete when offeree
receives the letter.

 It is necessary that the person have knowledge of the offer because

logically a person cannot accept an offer that they do not know about.
 Ex: if a person offers a reward for the return of lost cat – someone
return it without knowing about the offer – they cannot claim the
reward.
 Case: R vs Clarke (1927)

(The case revolved around this issue of acceptance and the

requirement that, to be valid, acceptance must be given in response
to the offer.)
INVITATION TO TREAT
 An ‘invitation to treat’ is not an offer but a sort of preliminary
communication which passes between the parties at the stage of
negotiation
 The following are examples of invitation to treat:

1. The display of goods in a shop window or on a supermarket shelf.

 CASE: Fisher v Bell (1960)

2. Advertisement, catalogs and brochures

 CASE: Majumder vs Attorney-General of Sarawak (1967)
 CASE) : Carlill v Carbolic Smoke Ball Company (1893)

3. Auction
 CASE: Payne v Cave (1989)

4. Invitation to tender for work

 CASE: Spencer v Harding (1870)
TERMINATION OF PROPOSAL
 A proposal maybe terminated/become invalid by the
following circumstances:

1. Sec 6 (a) CA 1950: Notice of Revocation

2. Sec 6 (b) CA 1950: Expiry of proposal due to:

 termination of stated time period
 if no time stated – lapse of reasonable time

3. Sec 6 (c) CA 1950: Acceptor not fulfill condition

4. Sec 6 (d) CA 1950: Death or mental disorder of the proposer

which is known to the acceptor

5. (CASE: Hyde v Wrench): Affected by counter offer.

 HYDE V WRENCH
 The defendant offered to sell his farm to the plaintiff
for 1000 pounds. The plaintiff replied with an offer of 50
pounds discount (this being the counter offer) which the
defendant refused. The plaintiff then tried to accept the
original offer of 1000 pounds. It was held the defendant
could refuse this also since his original offer has been
rejected
REVOCATION OF PROPOSAL
 Section 5 (1)CA 1950: Proposal may be revoked before its
acceptance is made

 Proposal must be communicated to the acceptor and will

only valid when acceptor receives the revocation notice
either directly from proposer/3rd party.

 CASE: Byrne v Tienhoven (1880)

BYRNE V TIENHOVEN(1880)
 The defendants, a firm in Cardiff, offered by a letter on 1st
October to sell tinplate to a firm in New York. On 11th
October, the plaintiff received the letter and immediately
accept the offer by telegraph. On 08th October, the
defendants sent a letter of revocation to withdraw their
original offer which the plaintiffs received on 20th October.
 The court held that a contract had come into existence
because the offer had been accepted by telegram on 11 th
October before the plaintiff received the revocation letter
on 20th October.
ACCEPTANCE
ACCEPTANCE
 Section 2(b), CA 1950, an acceptance must
involve acceptance of the proposal and must be
signify by acceptor to proposer.

 Once there is an acceptance by the offeree, an

agreement between the parties is created. A
contract exists and it is binding upon the parties.

 Illustration:
A offers to sell his car to B for RM50,000. B agrees
to buy it for that price. This is an acceptance. A
contract is therefore binding between them.
CONDITIONS OF VALID ACCEPTANCE
 Section 7 (a),CA 1950
 An acceptance must be absolute and
unqualified
 The term “absolute & unqualified means that, the
acceptance must be made without any further/
additional conditions or qualifications to the original
offer. The acceptance must be made exactly on the
same term of the offer, without any modification.
 if an acceptance is not absolute and unqualified
 may result to “a counter offer”
 Counter offer is treated as a rejection of the
original offer and therefore, there is no valid
acceptance exists. Due to that, the contract is not
binding.
 CASE: Hyde v Wrench
CONDITIONS OF VALID ACCEPTANCE
 Section 7 (b),CA 1950
 An acceptance must be communicated in some
“usual & reasonable manner”
 The offeree can communicate his acceptance in any
usual manner and reasonable manner, so long as the
manner which he used is the one which did not cause
any delay, and which brought the acceptance to the
knowledge of the offeror.
 Example: The offeree may communicate his
acceptance verbally either face to face or via a
telephone conversations, or in writing by letters, shorts
messages services (SMS) and any other usual
reasonable means of communications applicable
nowadays. So long as the manner of communication of
the acceptance is usual and reasonable.
 Case: Eliason v Henshaw (1819)
 Facts.
On February 10, 1813, (Defendants) sent a letter from Harper’s Ferry
to the seller (Plaintiff) at Mill Creek offering to purchase flour at $9.50
per barrel. The letter was sent to Plaintiff by wagon. The letter
required that an acceptance by Plaintiff be sent to Defendants by the
same wagon returning to Harper’s Ferry. Plaintiff received the offer
on February 14, 1813. Plaintiff sent a letter accepting the offer to
Defendants at Georgetown on February 19, 1813. On February 25,
1813, Defendants sent Plaintiff a letter acknowledging receipt of
Plaintiff’s acceptance, but stating that, because they had not heard
from Plaintiff previously, they had purchased flour elsewhere. In
March 1813, Plaintiff delivered the flour to Georgetown. Defendants
refused to accept the delivery. Defendants moved to instruct the jury
that if their evidence was found to be true, Plaintiff was not entitled to
recover on the alleged contract. The court did not give the requested
instruction and judgment was rendered for Plaintiff. Defendants
appealed.
 Issue.

Whether a contract is formed where the terms of the acceptance do

not mirror the terms of the offer.
 Held.
No. The lower court’s ruling is reversed. A contract
is not formed where the terms of the acceptance do
not mirror the terms of the offer.
 Discussion.

An acceptance must mirror the terms of the offer.

Any deviation from the terms of the offer will
invalidate the offer, unless the offeror agrees to the
deviation. Here, it is clear that Defendants required
that any acceptance letter be delivered to Harper’s
Ferry, and that this term was an essential part of the
offer. Plaintiff, however, sent his acceptance to
Georgetown. The acceptance did not conform to
Defendants’ offer and therefore did not form a
contract. The lower court should have instructed the
jury as requested by Defendants.
GENERAL RULE RELATING TO THE
MODE OF ACCEPTANCE
 Acceptance must be communicated.

 Mere silence cannot considered as acceptance.

 CASE: Felthouse vs Bindley (1862)

The plaintiff offered to buy a horse from his nephew in a letter. In the
letter, the plaintiff wrote he wanted to buy the horse for £30 15s’ and if
he did not hear from the nephew by the weekend, he would considered
the horse will be his. The nephew did not reply the letter. The horse was
then sold by mistake at auction. The auctioneer had been asked not to
sell the horse but had forgotten. The uncle commenced proceedings
against the auctioneer for conversion. The action depended upon
whether a valid contract existed between the nephew and the uncle.

Held:

There was no contract. Because the nephew had remained silent in

response to the plaintiff’s offer and therefore, there was no acceptance.
 ACCEPTANCE………..(CONT’)
 Acceptance can be signify:
 In writing
 Verbal communication or;
 By conduct.

 Completion of acceptance - essential for the formation of

contract
 This is because acceptance is only valid before proposal becomes
invalid
 Once completed, acceptance cannot be revoked

 Exceptions to the Need of Communication of Acceptance

- Even though the general rule provides that an acceptance must be
communicated. There are a number of exceptions to this general
rule. Under these exceptions, the acceptance need not be
communicated to the offeror.
EXCEPTIONS TO THE NEED OF
ACCEPTANCE
 Exceptions to the Need of Communication of Acceptance
 The exceptions are:

- Unilateral Contract
(Errington v Errington (1952)

- General Offer
(Carlill v Carbolic Smoke Ball Co (1893)

- Reciprocal Promises

- Acceptance through post (Postal Rule)

(Household fire and Carriage Accident Insurance v Grant
(1879)
EXCEPTIONS TO THE NEED OF
ACCEPTANCE
 Unilateral Contract
- A contract whereby the offeror is bound to the contract once the offeree
fulfills or complies with the conditions/ requirements of the offer as
stipulated by the offeror himself. This happens for instance in the situation
where the offeror prescribed the “mode of acceptance”
- Once the offeree fulfilled the mode of acceptance, the acceptance is
complete and binding on the offeror even though the acceptance does
not reach the knowledge of the offeror.

- Case: Errington v Errington (1952)

- A father promised his son and daughter in law that a house in which
they were living should be belong to them as soon as they had paid off
the installments of a mortgage on the house. The son started to pay
the installments without the knowledge of the father.
- Held: There was a contract between the father and the son. The
father’s promise was a unilateral contract. The acceptance become
valid, once the son started to pay the installments even though the son
did not communicate his acceptance to his father.
 EXCEPTIONS TO THE NEED OF
ACCEPTANCE
 General Offer
- It is general offer, it does not require any communication of
acceptance. Performance of the conditions of the offer will be
sufficient to constitute a valid acceptance.
- Since a general offer is address to the public at large, it could
not be expected that the public must communicate their
acceptance to the offeror.
- So long as the requirements of the offer have been fulfilled, the
offeror is bound to anyone who have fulfilled such
requirements/conditions.
- Case: Carlill v Carbolic Smoke Ball Co (1893)
 EXCEPTIONS TO THE NEED OF
ACCEPTANCE
 Reciprocal Promises
- A reciprocal promises are promises which form the consideration for
the promises of each other party to the contract
- Section 2(f) CA 1950 provides:
- “promises which form the consideration…for each other are called
reciprocal promises”
- Illustration:
A offers to buy a car belongs to B for the price of RM50,000. Together with
his offer, A tender a piece of cheque for a value of RM10,000 as the down
payment for the car.
The cheque itself is a kind of a “promise”. Where the cheque is a written
promise by the drawer of the cheque (eg; A) that the payee will obtain
certain sum of money if he cashed it.
It means that the cheque itself is a “promise’ that form part consideration
for A’s promise to buy the car. Therefore, the cheque itself is the reciprocal
promise.
EXCEPTIONS TO THE NEED OF
ACCEPTANCE
 Acceptance through post (Postal Rule)
- Acceptance through post is complete when the letter of
acceptance is posted, even though it has not come to the
actual knowledge /received by the offeror.
- Sec 4(2) (a) CA 1950 stated acceptance is complete when
transmitted.
- Its applicable when transmitted (by post, email, fax etc)
even proposer do not receive the acceptance.
- Case: (Household fire and Carriage Accident Insurance v
Grant (1879)
 HOUSEHOLD FIRE AND CARRIAGE
ACCIDENT INSURANCE V GRANT (1879)

 Mr Grant applied for shares in the Household Fire and Carriage

Accident Insurance Company. The company allotted the shares
to the defendant, and duly addressed to him, posting a letter
containing the notice of allotment. The letter was lost in the
post and he never received the acceptance. Later the
company went bankrupt, and asked Mr Grant for the
outstanding payments on the shares, which he refused saying
there was no binding contract. The liquidator sued. The
question was whether Mr Grant's offer for shares had been
validly accepted, and was he legally bound to pay?
 Held: The acceptance letter was valid even though he never
received the letter verifying the acceptance. It is because the
rule for the post is that acceptance is effective even if the
letter never arrives
REVOCATION OF ACCEPTANCE
 Section 5 (2) CA 1950: Acceptance may be revoked before
communication of acceptance is known by proposer.

 Therefore, acceptance may be revoked although it has been

transmitted by acceptor, provided the proposer does not know
about the acceptance yet.

 Revocation is not possible where proposer has knowledge of

acceptance.

 CASE: Byrne v Tienhoven (1880)

BYRNE V TIENHOVEN(1880)
 The defendants, a firm in Cardiff, offered by a letter on 1st
October to sell tinplate to a firm in New York. On 11th
October, the plaintiff received the letter and immediately
accept the offer by telegraph. On 08th October, the
defendants sent a letter of revocation to withdraw their
original offer which the plaintiffs received on 20th October.
 The court held that a contract had come into existence
because the offer had been accepted by telegram on 11 th
October before the plaintiff received the revocation letter
on 20th October.
(1) A proposal may be revoked at any time before the
communication of its acceptance is complete as against
the proposer, but not afterwards.
(2) An acceptance may be revoked at any time before
the communication of the acceptance is complete as
against the acceptor, but not afterwards.
Illustration
 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.
 B may revoke his acceptance at any time before or at
the moment when the letter communicating it reaches
A, but not afterwards.
 REFERENCES
 Legal principle (2015), The Malaysian
Insurance Institute, 1st Edition.