CHAPTER 3 : LAW OF CONTRACT LEARNING OUTCOME Students should be able to: Understand the term of ‘contract’ Identify the general elements required in forming a contract. Differentiate an ‘offer’ from ‘invitation to treat’. To evaluate all elements of a valid contract In your opinion what is a contract? It is an agreement made between two (2) or more parties, which the law will enforce. For example: Travelling by public transport Going to a supermarket and purchasing goods Reserving accommodation at a hotel Employing or being employed Section 2(h) of the Contracts Act 1950 provides: “ an agreement enforceable by law is a contract”. Section 2(g) states that “an agreement not enforceable by law is said to be void”.- cancelled/terminated Therefore a contract can be said to be a valid agreement. From your point of view, what are the general elements required for the formation of a valid contract? Four essential elements of a valid contract: 1) Proposal (offer) 2) Acceptance 3) Consideration ; and 4) Intention to create legal relations 5) Capacity 6) Certainty 7)Free consent – void and voidable contract 1st element: PROPOSAL Section 2(a) of the Contracts 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”. For example Abu advertised in the Moon Mail that he will give a reward of RM100 to anyone who finds his pet; OR John wrote offering to sell his MyVi car to Sunny for RM20, 000. The person making the proposal is called the ‘promisor’ or is also referred to as the ‘proposer’. If one of the parties fails to act in accordance with the agreement or break the promise, then the other party – innocent party may pursue a civil action for breach of contract. Seller---------buyer For example: Obama and Osama forms an agreement between them. In the event Obama breaches the contract, Osama may sue him (Obama) in a court of law for the said breach. Do you think that a proposal must be made to an individual only or can it be made to the public??? A proposal can be made to an individual, to a class of persons, a firm, and a company or to the public at large. In the case of Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256, CA. Fact: The defendants 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 ball as prescribed and caught influenza. She sued the company for the promised reward. Arguments from the defendant: The defendants contended that the contract is made with all the world- that is with everybody and that one cannot contract with everybody. Held: It was held that an offer can be made to the entire of the 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. CARBOLIC SMOKE BALL WILL POSITIVELY CURE COUGHS COLD IN THE HEAD COLD ON THE CHEST CATARRH ASTHMA HOARSENESS LOSS OF VOICE THROAT DEAFNESS SNORING INFLUENZA HAY FEVER CROUP WHOOPING COUGH BRONCHITIS SORE THROAT SORE EYES HEADACHE NEURALGIA As all the Diseases mentioned above proceed from one cause, they can be Cured by this Remedy. £100 REWARD WILL BE PAID BY THE CARBOLIC SMOKE BALL CO. to any Person who contracts the Increasing Epidemic, INFLUENZA , Cold, or any Diseases caused by taking Cold, after having used the CARBOLIC SMOKE BALL according to the printed directions supplied with each Ball. £1000 IS DEPOSITED with the ALLIANCE BANK, Regent Street, showing our sincerity in the matter. During the last epidemic of INFLUENZA many thousand CARBOLIC SMOKE BALLS were sold as preventives against this disease, and in no asscertained case was the disease contracted by those using the CARBOLIC SMOKE BALL. When is the communication of the proposal complete? The proposal must be communicated to the promise. Sec 4(1) of the Contracts Act 1950 provides: “ the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made”. For example if Labu writes a letter to Labi offering to sell his Ferrari car, the communication of offer is complete when Labi knows about the offer himself. For example: A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter. When is a proposal considered to be revoked or terminated? cancelled.. Notice of revocation: section 6(a) of the Contracts Act 1950. Lapse of time- if no time stated in the proposal, then the proposal lapses after a reasonable time: section 6(b) of the Contracts Act 1950. Failure of the acceptor to fulfill a condition precedent: section 6(c) of the Contracts Act 1950. Death 1950 or mental disorder party: section 6(d) of the Contracts Act What does not amount to an offer? Invitation to treat comes from the Latin phrase ‘invitatio ad offerendum’ and means an “inviting an offer” It is an expression of willingness to negotiate. A person making an invitation to treat does not intend to be bound as soon as it is accepted by the person to whom the statement is addressed. An invitation to offer is not an offer INVITATION TO TREAT (ITT) 1) ADVERTISEMENT 3) AUCTION 2) DISPLAY OF GOODS 4) TENDER ITT=NOT OFFER 1) Circulars and advertisements Case: Carlill v Carbolic Smoke Ball Co is a good example of a manufacturer’s offer by means of advertisement. Therefore, an advertisement for the sale of goods displayed to the public may be an invitation to treat. Case: Majumder v Attorney General of Sarawak (1967), the Federal Court held that an advertisement in the newspaper for the post of a doctor was not an offer but merely an invitation to treat. Coelho v. The Public Services Commission Held: the Malay Mail advertisement was an invitation to qualified persons to apply and the resulting applications were offers. 2) Display of goods for sale is not an offer but merely an invitation to treat Case : Fisher v Bell (1961) In this case a price-marked flick-knife was displayed for sale in a shop window. The seller was prosecuted under the now repealed Restriction of Offensive Weapons Act 1961, which made it an offence to offer to sell such items, and was acquitted. Lord Parker stated: “It is clear according to the ordinary law of contract that the display of an article with a price on it in a shop window is merely an invitation to treat. It is in no sense an offer for sale, the acceptance of which constitutes a contract”. This case involved the display of a flick knife in a shop window contrary to legislation which prevented such items being offered for the purpose of sale. Case: Pharmaceutical Society of Great Britain v Boots Cash Chemist LTD [1952]2 All ER CA The issue in this case was whether there was a sale when a customer selected items he wished to buy and placed them in the basket? Payment was to be made at the exit where a cashier was stationed. Held: the display was only invitation to treat. A proposal to buy was made when the customer put the articles in the basket. Therefore, the contract would only be made at the cashier’s desk. 3) Auctioneer’s invitation for bids COMPETITIVE BIDS An auctioneer inviting bids offers an invitation to treat when a bidder makes a bid. auctioneer: making ITT bidder: make proposal. A call for bids by the auctioneer is not an offer, it merely an invitation to treat. When people place bids to buy the auction item, they are regarded as making offers to buy the item. The auctioneer is free to accept or reject the bid Case: Payne v Cave (1789) 3 Term Rep 148; 100 ER 502 Is an old English contract law case, which stands for the proposition that an auctioneer's request for bids is not an offer but an invitation to treat. The bidders make the offers which can be accepted by the auctioneer. Mr Cave had made the highest bid for a good in an auction. But then, Mr Cave changed his mind and he withdrew his bid before the auctioneer brought down his hammer. It was held that Mr. Cave, the defendant, was not bound to purchase the goods. His bid amounted to an offer which he was entitled to withdraw at any time before the auctioneer signified acceptance by knocking down the hammer. 4) Tender Case: Spencer v Harding The defendant offered to sell stock by tender, but the court held that there was no promise to sell to the highest bidder, merely an invitation to offers which they could then accept or reject at will. Case: Haevela Investments v Royal Trust of Canada[1986] Held: because the defendants had made clear an intention to accept the highest tender, then the invitation to tender was an offer accepted by the person making the highest tender. 2nd element: ACCEPTANCE Section 2(b) of the Contracts Act 1950 said: “..... when a person to whom the proposal is made signifies his assent/consent thereto, the proposal is said to be accepted, a proposal when accepted becomes a promise...” Acceptance occurs when an offeree agrees to be mutually bound to the terms of the contract by giving consideration, or something of value like money, to seal the deal. Keep in mind that acceptance follows the mirror image rule, in that acceptance is valid if the product or service rendered is exactly what was contained in the offer. Section 9 of the Contracts Act 1950 states that: methods of acceptance- expressed eg oral/ in writing implied eg body gesture “... when the acceptance is made in words, the acceptance is expressed, when the acceptance is made other than in words, it is implied...” Section 7 (a) of the Contracts Act 1950 provides that: “... be absolute and unqualified...” precise/clear The acceptance must be made on exactly the same terms proposed without modifications or variations Any modifications or variations amounts to a counter proposal by the party to whom the original proposal was made. (A counter offer is treated as a rejection of the original proposal). If one party makes an offer and the offeree makes a counter offer, does the original offer remain open? COUNTER-OFFER/PROPOSAL A counter offer is an offer made in response to a previous offer by the other party during negotiations for a final contract. ... Making a counter offer automatically rejects the prior offer, and requires an acceptance under the terms of the counter offer or there is no contract. Hyde v Wrench (1840) Facts: Defendant offered to sell his farm to the plaintiff for 1,000 pounds. Plaintiff made a counter offer of 950 pounds but defendant refused to sell. Plaintiff wrote again offering to pay 1,000 pounds. The defendant refused and the plaintiff sued for specific performance – REMEDY/COMPENSATION/REWARD/GRANTED BY THE COURT Held: By making a counteroffer, the plaintiff rejected the original offer and he was not entitled to revive it. Under these facts the parties did not form a binding contract. Therefore, a counteroffer negates the original offer. ** However further communication between the parties subsequent to the original proposal is permissible. It is important to distinguish between counter proposal and request for further information. A mere request for information is not a counter offer. If the offeree asks the offeror for more information, the original offer stands and the offeree has neither accepted or rejected the offer. Referring back to the above example, if B merely asks A if the £1000 includes delivery of the books, this would be classed as a mere request for information, not a counter offer. Once a valid acceptance takes place, a binding contract is formed. It is therefore important to know what constitutes a valid acceptance in order to establish if the parties are bound by the agreement. There are three main rules relating to acceptance: 1. The acceptance must be communicated to the offeree.(EXPRESSED/IMPLIED) SEC 9 2. The terms of the acceptance must exactly match the terms of the offer.(MIRROR IMAGE RULE) 3. The agreement must be certain. (SEC 7) Issue : DOES SILENCE AMOUNT TO ACCEPTANCE???? General rule: Silence of the offeree does not constitute an acceptance of the offer. For example, the offeree says: ‘I want to buy your Myvi car for RM50,000 and if you are silent on this proposal, I will presume that you have accepted my offer.’ NO…the law clearly states that silence cannot constitute an effective acceptance. The reason for this is because acceptance requires that the offeree must express, either by words or by conduct. One of the requirements of a valid acceptance is that it has to be communicated to the offeror. Felthouse v Bindley (1862) 142 ER 1037 Facts: In this case an uncle offered to buy a horse from his nephew. After some negotiations, he made an offer in a letter saying "if I hear no more about him I shall consider the horse mine". The nephew did not answer this offer but he told the auctioneer to keep the horse out of a sale. The problem arose because the auctioneer mistakenly sold the horse to someone else. The uncle then sued the auctioneer on the basis that the horse belonged to him. Held: The court held that there could not be a contract in the circumstances where the uncle imposed a contract by saying "if I hear no more about him I shall consider the horse mine". It was not possible for the uncle to impose contractual liability on the nephew. **However, there is a situation where a silence can be treated as a valid acceptance. Issue: When might silence constitute acceptance? Where the conduct of the offeree indicates acceptance, there is an invitation that silence amounts to acceptance. Case: Weatherby v Banham In this case, where an offeror offered to supply goods to the offeree by sending the goods to him, acceptance of the offer arose when the offeree began using the goods. Under the Unsolicited Goods and Services Act 1971, if an offeror sends unsolicited goods to an individual in certain circumstances, as stipulated by the Act, that individual may treat those goods as a gift and is able to treat the goods as his own, without incurring contractual liability. It was held that where silence after received and reads a magazine after the expired date of subscription is consider being a valid acceptance. REVOCATION OF ACCEPTANCE Section 5(2) Contracts Act 1950:- An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Illustrations A proposes by 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 A, but not afterwards. 3rd element: CONSIDERATION Section 26 of CA 1950: An agreement made without consideration is VOID. Consideration is defined in section 2(d) of the Contracts Act 1950: “when at the desire............................... is called for the promise” Something of value given in exchange for something else of value, usually in the context of a contract. Consideration is the benefit that each party receives, or expects to receive, when entering into a contract. Consideration is often monetary, but it can be a promise to perform a specific act, or a promise to refrain from doing something. In order for a contract or agreement to be legally binding, every party to the contract must receive some type of consideration. In other words, a contract is a two-way street, so each party must receive something of value from the other party or parties. Illegal or immoral acts are not legally considered to serve as consideration. Consideration must be a lawful consideration..stolen car= unlawful consideration.. Example 1 John backed into Allen’s car, damaging it. John is liable to pay for the damages, but does not have the money right now. While Allen could sue John for the damages to his car, he enters into an agreement with John to give him 90 days to pay the full amount of $1,500, plus an additional $250 for the inconvenience. The agreement states that Allen will not file a lawsuit before the 90 days is up, but is free to do so after that time. This agreement, or “contract,” provides consideration for both parties: John’s benefit: Allen gives up the right to sue for a period of 90 days Allen’s benefit: John will pay for the damages, plus an additional amount of $250 Example 2 Brittney agrees to sell her car to Bill for $1,000. Bill’s payment serves as consideration for Brittney’s promise to sell the car to him. Brittney’s consideration is her promise to sell him the car. Types of consideration 1. Executed Consideration where an act is done/ promise made in return for the performance of an act. (reward situation). Example: Laila lost her wallet. She offers a reward of RM100 for anyone who found her wallet and returns her wallet. Majnun found her wallet and returns it to her. She paid the reward of RM100 to him. Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256 The company’s offer= promise. Carlil bought, used the smoke ball and still suffered from influenza= performance of the act- Carlil’s consideration is executed to the company’s promise- It creates a binding contract). Held: The company needs to execute the promise; to pay reward to Carlill. (act/ promise) 2. Executory Consideration One promise is made in return for another promise/ other party’s promise. The whole transaction remains in future, i.e. a promise for a promise in future. K. Murugesu v Nadarajah [1980] 2 MLJ 82 The respondent was the tenant of the appellant. The respondent had pestered the appellant to sell to him the house he was leaving in. The Appellant agreed to sell a house to the Respondent at $ 26,000 only within three months from the date of the agreement. Later on the Appellant refused to sell and alleged that there is no consideration therefore the agreement was void. Court held: There is an executory consideration where a promise made by one’s party in return for a promise made by the other. The court referred to the words of illustration (a) to section 24 of the Contract Act; “ A agrees to sell his …………………………………………………… these are lawful consideration”. The court held that there was a promise against a promise; one promise was consideration for the other because each may have his action against the other for non performance. Consideration: price 3. Past Consideration A promise after an act has been performed. The act must be done in reliance of the promise. For example, Ketiak was swimming in a river suddenly he got into difficulty. Lengan who happened to be nearby, heard his cries for help, dived into the river and saved his life. Ketiak promised to give Lengan RM100 for saving his life. The act Lengan in saving Ketiak’s life was wholly performed before the promise was made. Lampeigh v Braithwait (1615) 80 ER 225 B was sentenced to death for murder. Then he requested L (a lawyer) to do all he can as to enable him to get pardon from the King OF London. L then do everything that he can by using his own expenses and finally B successfully got the pardon. B then promised to give L a 100 pound. But subsequently he failed to pay and L sued B for that. B then argued that “there was no consideration from L when B made a promise to pay money to L. Court held: There was past consideration from L. He entitled for 100 pound for the service that he done before the promise was made. Can a consideration move from a person who is not the promisee? Section 2(d) of CA 1950 “....promisee or any other person...” Venkata Chinnaya v Verikatara'ma’ya (1881) ILR 4 Mad 137 Facts: A sister agreed to pay an annuity of Rs653 to her brothers (who provided no consideration), if their mother transfer some land to her. When their mother had given the sister some land, the sister failed to fulfill her promise. Her brothers sued the sister. Court Held: She was liable on the promise on the ground that there was valid consideration for the promise even though it did not move from the brothers. Should consideration be adequate or sufficient??? Consideration need not be adequate It is not necessary that there must be full return for the promise. There must be something rather than nothing. For example, A agrees to sell his watch worth RM100 only for RM10. A's consent to the agreement was given freely. The agreement is enforceable even though the watch is being sold for just one-tenth of its price. What is deemed “sufficient”??? Consideration must have values in the eyes of law If the promisee performs a legal duty and nothing more this is not sufficient consideration In the case of Ward v Byham (1956) The father of a child wrote to the mother, saying that he would pay her an allowance of £1 per week if she proved that the child was “well looked after and happy”. Held: mother was entitled to enforce the promise because in undertaking to see the child was well looked after and happy, she was doing more than her legal obligation 4TH element: INTENTION TO CREATE LEGAL RELATION Even though the Contracts Act is silent as to the intention to create legal relations as one of the requirements to form a valid contract, decided cases or case laws lays out the necessity of this requirement. In other words, in order to form a valid contract, there must exist an intention to create legal relations. In its simplest form, intention to create legal relations means that the parties must intend to enter into a legally binding arrangement in which the rights and obligations of the agreement are enforceable. Why Intention to Create Legal Relations Is Important? Intention to create legal relations indicates the intention of parties to enter into a legally binding agreement. It shows that the parties are ready to accept the legal consequences of the agreement, which means that they are serious about it. Types of agreements Intention to create legal relations Commercial agreements (presumption of intentions) family, social & domestic (presumption of no intention) Commercial agreements In commercial agreements, there is a presumption that the parties DO intend to make a legally binding contract. It is not necessary for the plaintiff in the ordinary run of commercial agreements to supply evidence affirming that there was an intention to create legal relations. But the defendant may rebut the presumption by reference to the words used by the parties and/or the circumstances in which they used them: In the case of Carlill v Carbolic Smokeball Co (1893), the defendant had claimed extravagantly in an advertisement about the efficacy of their smokeball preventing influenza. They supported this claim with a promise to pay £100 to anyone who used it and yet caught influenza within a specified period. They (carbolic) stated that in order to show their sincerity, they had deposited £100 with their bankers. The plaintiff bought smokeball and caught influenza. The defendant contended that the advertisement (mere offer) was a mere puff and was not intended to create legal relations. (ARGUMENT MADE BY THE COMPANY) The Court of Appeal rejected the defendant’s contention. The fact that the deposit was in the bank was strong evidence that the defendant had contemplated legal liability when they issued their advertisement Family agreements Family arrangement: 1. Agreement between husband and wife- LEGAL INTENT DOES NOT EXIST In family and social arrangements there is difficulty to suggest legal intent that would become contracts because of the domestic arrangement such as between husband and wife. In the case of Balfour v Balfour (1919), it was ruled that because husband and wife were living in amity, there was no legal intent when an agreement was made because of the domestic situation as husband and wife, and that their dispute should be settled without legal proceedings. In this case it was presumed that legal intent does not exist. Lord Justice Atkin in Balfour v Balfour (1919) “Agreements such as these are outside the realm of contracts altogether. The common law does not regulate the form of agreements between spouses…The consideration that really obtains for them is natural love and affection which counts so little in these cold Courts.” In the case of Merritt v Merritt (1970), The husband left the wife to live with another woman. The husband and wife became separated when they made an agreement. The wife made him record this agreement in writing. The husband promised to pay for certain expenses, he did not, and defended himself by claiming that the agreement was made within his family and did not have legal relations. However, the court found the agreement to be enforceable because the agreement was made when they were not in living amity and when they became separated. The presumption of legal intent was rebutted in this case because there was evidence that they were not living together. Therefore, the court may enforce an agreement if it is made when husband and wife are not living in amity or are separated. Family agreement: 2. Agreement between parent and child In Jones v Padavatton (1969), in this case, Mrs. Padavatton (Daughter) was working as a secretary in the US. Her mother, Mrs. Jones offered to pay for her daughter’s expenses if she agreed to return to England to study for the Bar. Mrs. Padavatton accepted. Later on, Mrs Jones offered to provide a house for her daughter but, some of the rooms in the house were to be let to tenants. However, Mrs Padavatton became uncooperative towards her mother. As a result, Mrs Jones claimed possession of the said house. Mrs Padavatton argued that her mother had agreed to give her the house and as such, was contractually bound to the said agreement. HELD: Mrs.Jones(mother) was entitled to possession of the house. The original agreement was motivated by her desire to see her daughter succeed at the Bar. They had no intention to enter into a stiff contractual agreement. Domestic Agreement Generally been presumed NOT to be intended to create legal relations In the case of Simpkins v Pays (1955), three people lived together in a house (lodger, grandmother & granddaughter) and jointly took part in a competition organized by a newspaper. The entries were made by one name only. One entry won the prize and the defendant, in whose name the entry was submitted refused to share it with the other two contributors claiming there was no intention to create legal relations. Issue: was there an understanding between the parties that their agreement amounted to a contract? It was a joint enterprise to which each contributed in the expectation of sharing the prize that they won. The court decided that due to the arrangement, it was referred to as a legal relation. Therefore, the lodger was entitled to one-third of the prize. Lodger Grandmother granddaughter 5th element: CAPACITY Is referring to the capacity of the parties to enter into a contract in terms of the following:1. Age 2. Non-bankrupt 3. Sound mind S 11 person is competent to contract if he is of the age of majority , age 18 years of sound mind not disqualified from contracting by any law AGE Tan Hee Juan v Teh Boon Keat P (a minor) contracted to transfer his land to the D. Later, the P applied to the Court for an order setting aside the contract. Held: The contract was void. The Court ordered the restoration of the land to the minor. Case : MOHORI BIBEE V DHURMODAS GHOSE An infant entered into contract of loan-he borrowed money and mortgage his house. His mother as guardian challenge the contract as void as the infant is still a minor. Held: Contract is void-sect 10 & sec 11 Contract Act. Exception 1. contracts for necessaries S 69 ( minor bound by the contract) Examples: food, shelter, clothing, medical etc Ryder v Wombwell D minor, bought a pair of crystal, ruby and diamonds solitaire and antique goblet in a silver gift. Held: contract void 2. contracts of scholarship/beneficial apprenticeship. Govt. of M’sia v Gurcharan Singh P sued the D for breach of a contract providing a course of training at a College. The claim was $11,500. At the time of the contract the D was a minor. Held: the D was liable for the repayment. 3. Insurance Act 1963 A minor over the age of 10 may enter into a contract of insurance. However if the minor is under the age of 16, a written consent of the parents or guardian is essential. 4. Marriage- a promise of marriage entered into by minors or their parents on their behalf is valid. Rajeswary & Anor v. Balakrishnan Parties were Ceylonese Hindu. Following customary practice, a marriage agreement was entered into with provisions of Dowry and Penalty for Breach. (plaintiff paid dowry). Parties went through betrothal ceremony. Defendant repudiated the promise of marriage to the plaintiff through series of letters. Plaintiff sue for damages for breach of promise of marriage. Defendant pleaded that plaintiff was a minor and incapacity to enter into contract of marriage. Held: Minor may, sue or be sued for such breach of contract of marriage. The decision in Mohori Bibee was not followed. Plaintiff was entitled to sue for damages as there was a valid contract of marriage. Marriage in Islam: Undang -Undang Keluarga Islam Selangor: valid age for boy is above 18 valid age for girl is above 16 If below that age, they must get permission from Hakim Syarie. 6th element: CERTAINTY Agreement : the meaning of which is not certain or capable of being made certain, are void. Case: Karuppan Chetty v Suah Thiam The contract was declared void for uncertainty because the parties agreed to a lease of $35 per month ‘as long as he likes’